Does India Gain From The Global Tax Deal?
A total of 136 nations last week agreed to a minimum corporate tax rate of 15% effective 2023. Additionally, countries have reached a consensus on reallocation of more than $125 billion of profits from around 100 of the world’s largest and most profitable multinational enterprises, such as Facebook Inc. and Google.
This will ensure multinationals pay a fair share of tax in countries they operate in and generate profits even if they don’t have a physical presence there, said a statement issued by the OECD which has been leading the multilateral talks.
What's referred to as Pillar One solution, market jurisdictions will get new taxing rights over global corporate giants with global sales above 20 billion euros. Such MNEs will pay 25% of profits over a 10% revenue margin to market jurisdictions. In turn, member countries will roll back their own unilateral levies.
For India, it could mean rolling back the equalisation levy and Significant Economic Presence rules. The government will reportedly take that decision once the global tax deal is implemented.
Broadly, a few factors will need to looked into before doing away with existing levies.
India will get additional taxing rights which is beneficial but the exact quantum will need to be compared to domestic equalisation levy, consulting firm EY said in a report.
Large Indian headquartered MNEs may also need to comply with Pillar One rules and India will need to share its taxing right with other countries, it has pointed out.
It's an interim solution which developing countries have been forced to live with, according to an open letter by the Independent Commission for the Reform of International Corporate Taxation.
The signatories to the letter include economists Thomas Piketty, Joseph E Stiglitz and other professors of economics at the Universities of Columbia, Oxford, Berkeley and Massachusetts Amherst as well politicians, lawyers and other tax experts.
"In the absence of sustainable solutions, countries should not be restricted from continuing to pursue alternative measures, such as digital services taxes, which are already generating revenue today," the ICRICT said.
Global Minimum Tax: The India Impact
Such a low minimum rate of 15% will turn out to be the global standard, and a reform that was intended to make sure multinationals pay their fair share will end up doing just the opposite, ICRICT has warned.
Developing countries, which rely relatively more on corporate tax income as a source of government revenues, and suffer the highest losses from corporate tax abuse as a share of their current tax revenues, would be big losers, it has said.
EY echoes a similar view.
A potential downside of global minimum rate is reduced ability of governments to use tax incentives to pursue specific policy objectives, such as promoting innovative activities or economic development, for instance, via investment tax incentives or tax incentives for research and development.
India ‘s concessional tax rate of 17% (including surcharge and cess) for new manufacturing companies just about meets the threshold. But some inbound structures may end up being subject to a rate below 15%, EY has pointed out.
The subsidiaries of foreign MNE Groups set-up in SEZs (special economic zones) claiming section 10AA benefits, and entities involved in infrastructure sector claiming deductions under section 80-IA series, etc. may come within Pillar 2 radar due to the effective tax rate being below 15%.EY Report
For outbound structures, low-taxed foreign subsidiaries may be impacted wherein tax may be collected on such income in India under income inclusion rule.
As per which, a parent company will be required to bring profits of foreign subsidiaries into account for the domestic taxation. This if the income of the foreign subsidiary was not subject to tax at a minimum rate.
As per EY, Indian outbound structures involving low taxed foreign subsidiaries may be impacted wherein tax may be collected on such income in India under income inclusion rule.
The significance of this rule will, however, be limited if the effective management of the foreign subsidiary is in India.
Income of subsidiaries having place of effective management in India are taxable on global basis by treating them to be tax residents in India. Such subsidiaries will not be subject to IIR levy by Indian parent.EY Report
Besides the impact on inbound and outbound structures, IIR assumes significance in the context of tax treaties too. IIR tax is also likely to negate any treaty benefit to achieve minimum taxation. This requires particular evaluation if the proposed rules are in line with treaty obligations and international law of “pacta sunt servanda” i.e. treaties must be respected and applied in good faith, as per EY.