Finance ministers of G-20 countries are scheduled to meet on October 13 in Washington to finalise the deal.
SEP rules were introduced this year to target large e-commerce companies, multinationals and unicorn start-ups that have a substantial user base or revenues in India but escape paying domestic taxes.
OECD had on Friday brought together 136 countries to accept a deal to ensure that large multinationals pay a minimum tax of 15% on their global incomes from 2023 and those with profits above a threshold will have to pay taxes in the markets where they conduct business.
OECD, however, wants countries such as India to withdraw any other unilateral measures aimed at multinationals before it accepts the global tax deal.
“The wordings of ‘other relevant similar measures’ of the OECD statement would cover SEP as well considering its far reaching implications and potential conflict with the two pillar mechanism,” said Rahul Garg, managing partner of tax and regulatory consultants Asire Consulting.
“If India wants to accept OECD’s tax deal, all unilateral measures like equalisation levy, and SEP must go, as countries can’t have it both ways,” said Amit Singhania, a partner at law firm Shardul Amarchand Mangaldas.
While SEP doesn’t impact companies and entities investing in India through treaty countries, tax experts say, the revenue department has in the past challenged the applicability of the tax treaties in several cases by questioning the identity of the ultimate beneficiary.
“While SEP was essentially targeted towards companies coming from non-tax treaty countries, often interpretation and eligibility of tax treaties is debatable. Also, India cannot target any of the 136 countries that have signed OECD’s global tax deal even if they do not have a bilateral tax treaty with India,” said Singhania.
The government had first come out with SEP regulations in 2018, but the threshold — that would determine who will come under the taxman’s net — was announced only in May, but applicable from April.
As per SEP rules, the government can tax multinationals or entities that do not have a presence in India and if they do transactions of Rs 2 crore or more a year here or have at least 3 lakh users.
If a company meets these criteria, it would create a “digital permanent establishment” in India.
A permanent establishment is a concept in taxation that determines which country has the first right to tax a company.
SEP, however, is in conflict with OECD’s global tax framework, experts say.
OECD calls it pillar 1 and pillar 2. Under pillar 1, OECD will estimate the quantum of additional profits that escape taxes and which country or jurisdiction has the right to tax it. Pillar 2 consists of a minimum tax rate – 15% – that these technology companies will have to pay in these jurisdictions.
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