OECD-G20 INCLUSIVE FRAMEWORK TAX DEAL
- Recently, India Joins the OECD-G20 Inclusive Framework Tax Deal on Base Erosion and Profit Shifting (BEPS), a new two-pillar plan to reform international taxation rules.
About OECD-G20 Inclusive Framework Tax Deal
- The proposed solution consists of two components:
- Pillar One is about the reallocation of an additional share of profit to the market jurisdictions and
- Pillar Two consists of minimum tax and subject to tax rules
- Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed.
- Further, the technical details of the proposal will be worked out in the coming months and a consensus agreement is expected by October.
Why did India join OECD-G20 Inclusive Framework Tax Deal?
- The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets, consideration of demand-side factors in profit allocation.
- There is a need to seriously address the issue of cross border profit shifting and need for the subject to tax rules to stop treaty shopping.
- India is in favour of a consensus solution that is simple to implement and simple to comply with.
- At the same time, the solution should result in the allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.
Impact on India joining OECD-G20 Inclusive Framework Tax Deal:
- The Pillar I of the OECD’s/G20’s two-pillar solutions to address tax challenge of digitalization of economy, seeks to usher in a special purpose nexus rule and profit allocation formula for reallocating a part of super normal profits of the largest (sales more than 20 billion Euros) and most profitable (more than 10 per cent global profitability) multinational groups, amongst market countries like India and China.
- With regards to India, this outcome will have quantitative benefits since it will ensure India gets its fair share of corporate tax on earnings from massive market it provides to MNEs.
- The broader agreement reached on Pillar II solutions is the most significant step towards ending the’ race to the bottom’ that countries have indulged in for decades. A global Min tax rule will ensure level playing field for countries like India that offers massive market for MNEs without providing a tax safe harbor.
- The latest developments would have potential to significantly contain the practice of treaty shopping, whereby companies or individuals attempt to indirectly access the benefits of a tax treaty between two jurisdictions without being a resident of one of those jurisdictions.
Back to Basics
What is Base Erosion and Profit Shifting (BEPS)?
- BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
- It thus “erodes” the “tax base” of the higher-tax jurisdictions.
- Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
- It is alleged that BEPS is associated mostly with American technology and life science multinationals.
G-20 ANTI-CORRUPTION WORKING GROUP
- Recently, India reiterated its commitment for eradication of corruption at the 1st ever Ministerial Meeting of G-20 Anti-Corruption Working Group. India is committed to the policy of zero tolerance against corruption and unaccounted money.
- India’s Prevention of Corruption Act, 1988, amended after 30 years in 2018 to introduce a number of new provisions including criminalizing the act of giving bribe etc.
- The commitment to bring in more transparency, more citizen centricity and more accountability in governance and is indicated by its decisive initiatives to operationalize the institution of the Lokpal in the country to check corruption at high places.
- India’s Fugitive Economic Offenders Act, 2018 empowers authorities for non-conviction-based attachments and confiscation of proceeds of crime and properties as well as assets of a Fugitive Economic Offender.
- Prevention of Money Laundering Act, 2002
- Right to Information Act, 2005.
- Whistleblowers Protection Act, 2014.
- Benami Transactions (Prohibition) Act, 2016.
- Ratification of United Nations Convention Against Corruption in 2011.
- Introduction of e-governance.
- Central Vigilance Commission
Back to basics
G-20 Anti-Corruption Working Group
- It was set up in June 2010 at the Toronto Summit of G-20.The year 2020 marks its 10th anniversary to prepare “comprehensive recommendations for consideration by leaders on how the G20 could continue to make practical and valuable contributions to international efforts to combat corruption”.
- It actively works with the World Bank Group, the Organisation for Economic Cooperation and Development(OECD), the United Nations Office on Drugs and Crime (UNODC), the International Monetary Fund (IMF), the Financial Action Task Force (FATF), etc.
The Stolen Asset Recovery Initiative
- The Stolen Asset Recovery Initiative is a partnership between the World Bank Groupand the United Nations Office on Drugs and Crime (UNODC) that supports international efforts to end safe havens for corrupt funds. StAR works with developing countries and financial centers to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets.
- StAR provides platforms for dialogue and collaboration and also facilitates contact among different jurisdictions involved in asset recovery. Since its establishment ten years ago, StAR has assisted many countries in developing legal frameworks, institutional expertise, and the skills necessary to trace and return stolen assets.
- StAR works with partners around the world to develop the most effective tools to tackle and prevent the theft of assets critical to development. StAR works with global organizations, including the Conference of States parties to UNCAC, the G8, the G20, and the Financial Action Task Force to influence and liaise with policymakers.
- Recently, India made it clear that it is not in a position to accept the concept of Data Free Flow with Trust (DFFT), which was originally proposed by former Japanese prime minister Shinzo Abe at the G20 summit last year.
Key Issues from Indian Side
- India is of the view that the concept of DFFT is neither well-understood nor is it comprehensive enough in the legislation of many countries.
- Moreover, in view of the huge digital divide among countries, there is a need for policy space for developing countries who still have to finalize laws around digital trade and data. Data is a potent tool for development and equitable access of data is a critical aspect for us.
- India is still in phase of preparing a framework for its data protection and e-commerce laws.
- Digital divide within and across nations is a serious impediment for developing countries to benefit from Digital Trade.
- Discussions and negotiations pertaining to data should be held within the context of the World Trade Organisation.
Back to basics
About Osaka Track
- The 2019 G20 Summit discussed eight themes to Ensure Global Sustainable Development.
- The eight themes were “Global Economy”, “Trade and Investment”, “Innovation”, “Environment and Energy”, “Employment”, “Women’s Empowerment”, “Development” and “Health”.
- Regards to “Trade and Investment”, support for the necessary reform of the World Trade Organization (WTO)was agreed. WHO Director-General Roberto Azevêdo had been participating in the summit, welcomed the communique.
- Regards to “Innovation”, necessity of respected and interoperable frameworks on Data Free Flow with Trust, both domestic and international, was discussed.
- Regards to “Environment and Energy”, a common global vision, the “Osaka Blue Ocean Vision” which is aiming to reduce additional pollution by marine plastic litter to zero by 2050 through a comprehensive life-cycle approach was shared.
- Leaders’ Special Event was also held, and “Digital Economy” and “Women’s Empowerment” were discussed. During the former event, “Osaka Declaration on Digital Economy” was issued, in which those leaders declared the launch of the “Osaka Track”, a process which demonstrates their commitment to promote efforts on international rule-making on digital economy, especially on data flow and electronic commerce.
India achieves key successes at G20
- India’s contribution to fight against Covid.
- India’s medical supplies to over 150 countries and spoke about our vision of One Earth, One Health which is essentially collaborative approach in fight against Covid.
- India continued to be a trusted partner in context of reliable supply chains.
- The latest Investment Trends Monitor published by the UN Conference on Trade and Development (UNCTAD) notes that while the widespread downturn in economic activity led to a decline in global foreign direct investment (FDI) by 42% in 2020, FDI received by India grew 13% in the same year.
- India as the fifth largest FDI recipient globally for 2020, up from the previous eighth position. Amid weak global investor sentiment, the country has continued to fervently push to reform FDI policy, improve investment facilitation and strengthen ease of doing business.
- In a big win for farmers, India pushed for and was able to obtain a commitment from G20 nations on improving livelihoods for small and marginal farmers.
- India has already installed 100 GW of renewable energy, adding that India is the only country among G20 nations that is progressing rapidly to meet its climate goals.
G20 VIRTUAL SUMMIT
- Recently, the G20 virtual summit hosted by Saudi Arabia where the Prime Minister of India called for a new global index based on transparency in governance and the creation of a vast talent pool. India also called for decisive action to preserve the planet.
- The two-day G20 leaders’ summit brought together the world’s largest economies that make up 85 per cent of the global GDP, and is expected to lay the foundations of an inclusive, resilient, and sustainable recovery from the Covid-19 crisis.
- India called for a “new global index” for the post-Corona world that comprises four key elements – (Four ‘T’)
- creation of a vast talent pool;
- ensuring that technology reaches all segments of the society;
- transparency in systems of governance; and
- dealing with Mother Earth with a spirit of trusteeship.
- The PM of India said that while the emphasis over the past few decades has been on capital and finance, the time has come to focus on multi-skilling and re-skilling to create a vast human talent pool which would not only enhance the dignity of citizens but would make our citizens more resilient to face crises.
- any assessment of new technology should be based on its impact on ease of living and quality of life.
- dealing with the environment and nature as trustees rather than owners would inspire us towards a holistic and healthy lifestyle, a principle whose benchmark could be a per capita carbon footprint.
- Multi-skilling and re-skilling to build a talent pool will enhance dignity and resilience of our workers. Value of new technologies should be measured by their benefit to humanity.
- India will host the G20 summit in 2022.
Back to Basics
About G20 Group
- An informal group of 19 countries and the European Union, with representatives of the International Monetary Fundand the World Bank.
- Members:Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom, United States, and the European Union.
- The G20 membership comprises a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85% of global gross domestic product, 80% of global investment and over75% of global trade.
Major Achievements of G20
- Increased participation of emerging countries in global issues.
- Facilitated an increase in lending from multilateral development banks of US$235 billion at a time when private-sector sources of finance were diminished.
- Major achievements of the G20 include the quick deployment of emergency funding during the 2008 global financial crisis.
- It also works for reforms in international financial institutions by improving oversight of national financial institutions. Ex- G20 driven reforms to the international tax system, through the G20/OECD Base Erosion and Profit Shifting (BEPS) project and implementation of tax transparency standards.
- G20 played a critical role in the ratification of the Trade Facilitation Agreement, with the WTO estimating it could contribute up to somewhere between 5.4 and 8.7% to global GDP by 2030 if the agreement were fully implemented.
The common criticism of the G20 format
- The informal structure of the G20, with a rotating chair and no permanent secretariat.
- Presidency changing hands every year, each country pushes its own pet theme and agenda with little continuity. For this year, Italy has given the slogan of the three Ps — Planet, People and Prosperity. “People” and “Planet” are, indeed, relevant themes, but for a world facing mounting inequality in the aftermath of COVID-19, the focus must be on recovery. “Prosperity” is a distant dream for most.
- Technology has become a crucial aspect of the post-pandemic recovery. Tech companies, today, are the ones making the most profit and the problem of taxing them is a particularly vexing issue.
- The kind of disruption we have seen during COVID is unprecedented, and unprecedented disruption requires unprecedented action. Building translates into infrastructure, but divisions within the G20 on the question of infrastructure already have a history.
- The G20’s toolkit ranges from simple exchanges of information and best practices to agreeing common, measurable targets, to coordinated action. None of this is achieved without consensus, nor is it enforceable, except for the incentive of peer review and public accountability.
- The decisions are based on discussions and consensus which culminates in the form of declarations. These declarations are not legally binding. It’s just an advisory or consultative group of 20 members.
- The G20 has to include objectives, vision and mission statements, a permanent secretariat, and staff to oversee commitments and ensure continuity in the agenda.
- The G20, instead of international commitments, can focus on domestic commitments and start implementing them. For instance, instead of ending international financing for coal power, the G20 Nations should phase out domestic coal consumption. This will create a significant impact as G20 nations represent more than three-quarters of the world’s greenhouse gas emissions.