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OECD/G20 framework on global tax: What does it mean for India?

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Withdrawal of “all digital services taxes and other such similar measures”, for India, would mean withdrawing the equalisation levy by 2023, which has been yielding the government nearly Rs 4,000 crore, with significant growth potential in the future.

OECD/G20 framework on global tax: What does it mean for India?
On October 8, 2021, the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) issued a “Statement on a Two Pillar Solution to Address the Tax Challenges Arising from the Digitisation of the Economy”. The statement, termed as “historic”, has been agreed to by 136 countries representing 90 percent of the global GDP (gross domestic product). The broad contours of the solutions identified in the October 8 statement remain the same as the previous one issued on July 1, with certain areas made clearer such as:
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Under Pillar 1, Amount A has been agreed to be equivalent of 25 percent of residual profits i.e. profits which are in excess of 10 percent of revenue.
- A clear pronouncement that Multilateral Convention (MLC) will require all parties to “remove all digital services taxes and other similar relevant measures with respect to all companies and to commit not to introduce such measures in the future”.
- For Pillar 2, the minimum tax rate used for purposes of the global anti-base erosion rules (GloBE) will be 15 percent and the minimum rate for the subject to tax rules (STTR) has been agreed to be 9 percent.
In this regard, a detailed implementation plan has been identified. The model legislation for Pillar 2 will be provided by November 2021, MLC will be introduced by “early 2022”, and they will be put up for signatures by mid-2022 and thereafter implemented by 2023.
Most importantly, the statement endorses and affirms a very laudable and important trend of international consensus in the field of taxation conducive on account of the present political climate as also perhaps the pandemic and the consequent revenue crunch faced by nations alike.
The reservations
Though laudable, several key areas yet remain to be addressed, including:
- For Amount A, the detailed source rules for specific categories of transactions are yet to be developed.
- The designing of safe harbour rules for capping marketing and distribution profits in case of residual profits are already taxed in a market jurisdiction
- The exact mechanism of the binding dispute prevention and resolution mechanism for Amount A
- The exact scope of “digital services taxes and other relevant similar measures” which are to be removed and the modality for such removal
- The work on Amount B (to be completed by the end of 2022)
- Apart from interest and royalties, the set of payments to which the STTR would apply
For developing countries…
While a unified front was displayed through the July 1 and now the October 8 statement, in the parallel one could notice certain “comments”, primarily from the developing countries, including from G24, a body representing 24 developing nations including India. The G24 suggestions given on  September 19 emphatically urged that without a meaningful share in Amount A (recommended by G24 to be least 30 percent of the non-routine profits) and a broader subject to tax rule (recommended by G24 to extend to payments for services and capital gains regarding which many developing countries are experiencing BEPS risks), “the solution if any, shall be suboptimal and shall not be sustainable even in the medium run”.
The October 8 statement doesn't abundantly resonate the viewpoints of G24, while capitulating fully to demands of Ireland (the newest nation to join the pact) with regards to fixing the global minimum tax rate to 15 percent.
To determine whether the October 8 statement would be a sustainable solution for developing countries in the short, medium or long run, it has been a subject matter of much debate. While it is touted that Pillar 1 would lead to $125 billion being distributed to market jurisdiction and Pillar 2 would lead to $150 billion of additional revenue annually. How much of it would actually trickle down to developing countries would be something that needs to be seen. What is clear is that the compromise for developing countries such as India would be substantial. Withdrawal of “all digital services taxes and other such similar measures”, for India would mean withdrawing the equalisation levy by the year 2023, which has been yielding the government nearly Rs 4,000 crore, with a significant growth potential in the future. Further, an acceptance of binding multilateral dispute prevention and resolution system of this nature is also something that is untested in the Indian context.
Given how digitisation has triggered a border-agnostic growth for businesses, a multilateral solution for their taxation is certainly the step in the right direction. In an ideal scenario, such a solution would achieve a simple and certain system of taxation, which can be easily administered by all the nations.
However, the success of the solutions as envisaged in the October 8 statement would wholly depend on the political consensus on perceiving such an agreement as being beneficial for all parties and on equal terms (more or less). One hopes that as finer details are agreed upon in the next two-three years, concerns raised by all factions of the negotiations are effectively addressed to make the solutions sustainable in the long run.
-Author Stella Joseph is a Partner at Economic Laws Practice. Views expressed by the author are personal
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