International Tax Reform Deal Signals End Date To India's Digital Tax
After years of slow progress and then months of hectic parleying, 136 countries and jurisdictions have agreed to an international tax reform agreement that sets a global minimum corporate tax rate and seeks to reallocate taxing rights in an effort to stop profit shifting.
The agreement seeks to "reallocate more than $125 billion of profits from around 100 of the world’s largest and most profitable multinational enterprises to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits" even if they don't have a physical presence there, said a statement issued by the OECD that has been leading the multilateral talks.
Friday's agreement is an update to what was announced in July. It is supported by all OECD and G20 countries. Four countries—Kenya, Nigeria, Pakistan and Sri Lanka—have not yet joined the agreement, the OECD said.
It's a two-pillar architecture, with the key features being:
MNEs with global sales above 20 billion euros and profitability above 10%, will be covered by the new rules.
25% of profit above the 10% threshold to be reallocated to market jurisdictions based on new special purpose nexus rule. (That's higher than the 20% allocation in the July plan.)
Taxing rights on more than $125 billion of profit are expected to be reallocated to market jurisdictions each year.
A global minimum corporate tax rate has been set at 15%. (The July plan stated "at least 15%".)
This new minimum tax rate will apply to companies with revenue above 750 million euros.
Estimated to generate around $150 billion in additional global tax revenues annually.
The agreement will be taken to the G20 Finance Ministers meeting on Oct. 13 and then to the G20 Leaders Summit at the end of the month.
"Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023," said the OECD.
Developing countries are expected to gain more revenue than advanced economies, the OECD estimates as the aim is to "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".
In exchange, unilateral measures such as digital services tax must stop. The agreement requires all countries to remove any digital tax levied on companies and commit not to introduce such a measure in the future. Currently, countries such as France and India are in a small but growing set that levy such a tax.
No new digital services or similar measure can be imposed starting Oct. 8, 2021 and up to Dec. 31, 2023 or earlier if the multilateral agreement comes into force, the OECD framework said.
While India has broadly supported the international tax reform it has remained ambivalent about eliminating its digital tax or equalisation levy.
There are two important changes in the final statement which would impact India, says Ajay Rotti, partner at tax consulting firm Dhruva Advisors.
"Firstly, India was always pushing for a higher allocation to market jurisdictions and that has been agreed at 25%. While this is the mid-point of the 20-30% range discussed earlier, it is still higher than what was agreed to by the G7," he said. "Secondly, all countries have agreed to roll back their digital levies with the introduction of the multilateral measures or December 2023. This would mean that Equalisation Levy would have to get rolled back."
The finance ministry's position on this isn't known yet.