Global Corporate Tax deal on 15% minimum tax rate for multinationals

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admin November 10, 2021
Updated 2021/11/10 at 9:10 AM

After months of discussions, a group of 136 countries, including the G-20 and the Organization for Economic Cooperation and Development, have agreed on the OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

The framework offers a two-pronged approach to addressing the tax difficulties posed by the global economy’s digitalization, as well as preventing a figurative ‘race to the bottom’ among governments seeking to attract investment by lowering tax rates.

“This is a significant victory for tax diplomacy, as well as a watershed point in international tax history.” “Securing a more assured and stable tax environment for multinationals and governments requires agreement on pillars one and two,” said Gouri Puri, Partner at Shardul Amarchand Mangaldas and Co.

The 136 countries, including India, will now enter a new round of talks to finalise the framework’s specifics. It’s also likely to come up in the next IMF-World Bank conference, which Finance Minister Nirmala Sitharaman will be attending.

Pillar one of the framework ensures that large multinational tech companies such as Amazon, Google, and others pay more taxes in countries where they have customers or users, regardless of where they operate from. However, they may not have physical or intellectual property in all of those markets, making taxation difficult.

Multinational firms having a worldwide turnover of more than 20 billion euros and a pre-tax profit of more than 10% of sales (known as supernormal profit) will be required to pay 25% of the profit before tax under this Pillar, which will be signed in 2022 and implemented in 2023.

This 25% will be distributed across nations according to a nexus-based allocation method that is currently being finalised.

Pillar Two, which was intended to go into effect in 2023 but has since been postponed until 2024, demands a 15% worldwide minimum tax. Its goal is to abolish the idea of tax competitiveness as a race to the bottom. Even a tax haven like Ireland, which was previously hostile to the concept and has a 12.5 percent corporation tax rate, has consented to join.

“A minimum tax agreement would effectively make tax competition among countries impracticable by limiting such chances to the most improbable scenarios.” Sumit Singhania, Partner of Deloitte India, expressed his thoughts.

According to Singhania, the two-pillar solutions that were eventually agreed upon would result in the transfer of $125 billion in taxable earnings each year, as well as ensuring that multinational corporations pay a minimum of 15% tax once these measures are implemented.

“The two-pillar proposals should be seen as a long-term revamp of a century-old international tax framework, with the potential to totally alter the rule of global profit distribution among taxing jurisdictions,” he added.

“While the fine print is being finalised, India is balancing its interests as a capital, goods, and services importer and exporter. According to Gouri Puri, the agreement would avoid a race to the bottom among nations.

While the OECD-G-20 countries have a lot of work ahead of them, one thing is certain: by 2023, India will have to abandon the equalisation fee, sometimes known as the “Google Tax.”

Non-resident e-commerce operators are subject to the Google tax. While it only applied to digital advertising services until 2019-20 at a rate of 6%, the government expanded the scope in 2020-21 to levy a 2% tax on non-resident e-commerce players. Adobe, Uber, Udemy, Zoom, Expedia, Alibaba, IKEA, LinkedIn, Spotify, and eBay are among the companies covered.

The government’s equalisation levy profits almost quadrupled to Rs 2,057 crore in FY21 from Rs 1,136 crore the year before. In 2016-17, the collection was Rs 338.6 crore, then rose to Rs 589.4 crore in 2017-18, and finally to Rs 938.9 crore in 2018-19.

Sandeep Jhunjhunwala, Partner, Nangia Andersen, stated, “The OECD has asked an immediate and forthright withdrawal of unilateral Digital Services Tax and a guarantee not to impose similar measures in the future.”

From October 8, 2021, no newly legislated digital services tax or other related equivalent measures will be placed on any firm, according to Jhunjhunwala, and existing ones would cease to apply in 2023.

India has also made a concession in that it has agreed to share 25% of super-normal earnings among countries, as opposed to its previous demand for at least 30%.

Policymakers in the finance ministry, on the other hand, believe that once Pillar Two is implemented, it would help India since nations will no longer be competing to cut corporate tax rates.

 

Source:  MoneyControl

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