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.
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