The Organization for Economic Co-operation and Development (OECD) published detailed rules on Monday for the implementation of a far-reaching global tax agreement aimed at subjecting multinational enterprises (MNEs) to a minimum tax of 15% from of 2023. With the OECD wanting countries to introduce the so-called Global Base Erosion (GloBE) rules into national legislation in 2022, India’s budget for 2022-2023 will likely clarify India’s position and begin to establish the legislative framework to incorporate these rules.
The minimum tax, known as Pillar Two, would discourage countries from competing to attract businesses by offering low tax rates. The new rules also allow countries like India to levy an additional tax on companies that fail to meet an effective minimum rate of 15% in another jurisdiction. Currently, an Indian multinational company could set up a unit in a zero-tax jurisdiction, legitimately pay no tax there, and not redistribute its profits to India.
Under the OECD multilateral pact, India would have the right to tax them at the minimum rate of 15%. globalization of the economy agreed in October 2021 by 137 countries, including India and jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The rules define the scope and establish the mechanism of the GloBE rules, which will introduce an overall minimum corporate tax rate.
The minimum tax would apply to multinational companies with revenues over €750 million and is expected to generate around $150 billion in additional global tax revenue each year. “The government must quickly define its positions to allow companies to assess and criticize their group structure and to start putting in place a compliance framework. India expects to derive gains from pillar two over pillar one and has informally expressed its preference for the application of STTR on base erosion payments,” said Aravind Srivatsan, Tax Leader & Partner, Nangia Andersen LLP.
The GloBE rules provide for a coordinated system of taxation aimed at ensuring that large multinational business groups pay this minimum level of tax on income derived from each of the jurisdictions in which they operate. “Chapters 3 and 5 are at the heart of the model rules which prescribe the determination of excess profit, adjusted covered taxes, jurisdictional top-up tax percentage for each low-tax jurisdiction, substance-based income exclusion in the calculation of GloBE income. These are complex rules and the principle of accounting consolidation which the parent entity would consolidate with its subsidiary or JV should now also carefully consider the impact on the tax implications of pillar two,” added Srivatsan. The first pillar would apply to multinational companies whose profitability is above 10% and whose worldwide turnover exceeds 20 billion euros. Profit to be reallocated to markets would be calculated as 25% of pre-tax profit on 10% of revenue.