India Joins OECD/G20 Inclusive Framework Tax Deal
India and the majority of the members of OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have joined a new two-pillar plan to reform international taxation rules.
The two-pillar plan – inclusive framework tax deal on Base Erosion and Profit Shifting (BEPS)– seeks to reform international tax rules and ensure that multinational enterprises pay their fair share wherever they operate.
Inclusive Framework Tax Deal
- The signatories of the plan amounted to 130 countries and jurisdictions,representing more than 90% of global GDP.
- The new framework seeks to address the tax challengesarising from the digitalisation of economies.
- It also seeks to address concerns over cross-border profit shiftingand bring in subject-to-tax rule to stop treaty shopping.
- Treaty shopping is an attempt by a person to indirectly access the benefits of a tax treaty between two countries without being a resident of any of those.
Two Pillar Plan:
- It will ensure a fairer distribution of profits and taxing rightsamong countries with respect to the largest MNEs, including digital companies.
- It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
- According to OECD, more than USD 100 billion of profit are expected to be reallocated to market jurisdictions each year.
- It is about minimum tax and subject-to-tax rules(All sources of income liable to tax without taking account of tax allowances).
- It seeks to put a minimum standard tax rate among countries through a global minimum corporate tax rate,currently proposed at 15%.
- This is expected to generate an additional USD 150 billionin tax revenues.
- It will ensure that large multinational companies pay their fair share of tax everywhere.
- The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-Covid recovery.
- India will have to roll back the equalization levy that it imposes on companies such as Google, Amazon and Facebook when the global tax regime is implemented.
- It is aimed at taxing foreign companies which have a significant local client base in India but are billing them through their offshore units, effectively escaping the country’s tax system.
- The levy at 6% has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements.
- India favours a wider application of the lawto ensure that the country won’t collect less under the proposed framework than it gets through the equalisation levy.
- India is in favour of a consensus solution which is simple to implement and simple to comply with.
- The solution should result in allocation of meaningful and sustainable revenueto market jurisdictions, particularly for developing and emerging economies.
- The Two Pillar Plan justifies India’s standfor a greater share of profits for the markets and consideration of demand side factors in profit allocation.
Base Erosion and Profit Shifting (BEPS)
- BEPS is a term used to describe tax planning strategies that exploit mismatches and gaps that exist between the tax rules of different jurisdictions.
- It is done tominimize the corporation tax that is payable overall, by either making tax profits ‘disappear’ or shift profits to low tax jurisdictions where there is little or no genuine activity.
- In general BEPS strategies arenot illegal; rather they take advantage of different tax rules operating in different jurisdictions.
- BEPS is of major significancefor developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).
The BEPS initiative is an OECD initiative, approved by the G20, to identify ways of providing more standardised tax rules globall