India, along with the majority of members of the OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), has announced a new two-pillar plan aiming to reform international tax regulations. Representing over 90% of the global GDP, 130 countries and jurisdictions are part of this initiative designed to ensure that multinational enterprises (MNEs) contribute their fair share of tax, irrespective of their operation locations.
The New Framework: Addressing Digital Economy’s Tax Challenges
Driven by the rise of the digital economy, the new framework is designed to tackle tax challenges arising from an increasingly digitalised world. It also aims to dispel concerns pertaining to cross-border profit shifting, introducing a subject-to-tax rule to halt treaty shopping—a practice where a person attempts to indirectly avail the benefits of a tax treaty between two countries without being resident in either country.
The Two-Pillar Plan Explained
Both pillars of the plan have distinct objectives. Pillar One ensures an equitable distribution of profits and taxing rights among countries with respect to top MNEs, including digital companies. It proposes reallocating some taxing rights of MNEs from their home countries to the markets wherein they conduct business and generate profits—even in the absence of a physical presence. According to the OECD, this could lead to annual relocation of more than USD 100 billion of profit to market jurisdictions.
Pillar Two addresses minimum tax and subject-to-tax rules, focusing on all income sources liable to tax without considering tax allowances. It proposes a global minimum corporate tax rate—currently suggested at 15%. The implementation of this pillar is expected to result in an additional USD 150 billion in tax revenues.
Significance and Impact
Beyond ensuring that MNEs pay fair taxes irrespective of their jurisdiction, the two-pillar package could bolster government efforts to raise revenues. This is crucial for repairing national budgets and balance sheets while also funding vital public services, infrastructure, and recovery measures needed in the post-Covid era.
India’s Stand on Global Tax Regime
With the implementation of the global tax regime, India will need to retract the equalisation levy imposed on companies such as Google, Amazon, and Facebook. This levy, in effect since 2016, is aimed at taxing foreign companies with a substantial Indian client base but billing through offshore units—effectively dodging India’s tax system. India advocates for a broader application of the law to ensure the proposed framework doesn’t reduce its current tax collection via the equalisation levy.
About Base Erosion and Profit Shifting (BEPS)
BEPS refers to a range of tax planning strategies that exploit mismatches and gaps between different jurisdictions’ tax rules. Primarily used to minimise corporate tax payable overall, these strategies use systemic discrepancies to make tax profits ‘disappear’ or move them to low-tax jurisdictions with negligible or zero genuine activity.
OECD, G20 and Their Role
The OECD, an intergovernmental economic organisation founded to stimulate global trade and economic progress, approved the BEPS initiative alongside the G20—a leading forum for economic, financial, and political cooperation among large economies. While India is a G20 member, it is not an OECD member but a key partner. The OECD/G20 Inclusive Framework was established in 2016, and India ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, an outcome of the OECD/G20 Project aiming to combat BEPS.
