OECD Tax Proposals:
- The OECD/G20 Inclusive Framework Tax Deal proposes two main elements – Pillar One, which calls for the redistribution of profits generated by the largest companies to the domicile markets where they actually make their sales instead of simply where they are headquartered
- Pillar Two, which establishes a global minimum effective tax rate of 15 percent determined on a country-by-country basis.
Global Minimum tax :
- Countries would change their tax laws so that if their companies’ profits go untaxed or lightly taxed offshore, the company would face an additional, top-up tax back home to bring its rate up to the minimum.
- That would remove the incentive for companies to shift profits to low-tax countries, so the thinking goes, because if those companies escape taxes abroad, they would have to pay it at home anyway.
- And the minimum would weaken the motivation for countries to enact rock-bottom tax rates to attract companies in the first place.
Size of the Problem:
- From 1985 to 2018, the global average corporate tax rate fell from 49 percent to 24 percent.
- And by 2000-2018, US companies booked half of all foreign profits in just seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.
- global minimum would end a destructive “race to the bottom” in international taxation.
Impact on Ordinary People:
- As the tax load on corporate revenue has declined, the overall tax burden has tended to shift to wages and labor — in other words, from generally affluent shareholders to ordinary workers.
- Another reason to care: According to the OECD, large companies that operate across borders enjoy an unfair competitive advantage by capitalizing on international tax avoidance strategies that aren’t available to local-only companies.
Philosophy behind the proposals:
- Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies.
- It would 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.
- Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
- the two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure.
- These are the measures necessary to help optimize the strength and the quality of the post-COVID recovery.
Benefits for the India
- This announcement marks the culmination of hectic international negotiations since the Base Erosion and Profit Sharing (BEPS) 2015 reports.
- India had strongly advocated greater taxing rights to source or market jurisdictions—a stand shared by most developing countries—given that new-age MNEs have figured out the basis to limit their global tax incidence through innovative tax structures and invisible presence due to digital technologies.
- Given the insights Indian policy-makers have gained from participating in these deliberations, it is expected that the law-makers will unveil a refined and nuanced direct taxation
Challenges with the India:
- The complexity is writ large with international tax community and leading experts being equally sceptical on the pragmatic success of these proposals.
- Furthermore, its application requires real-time information sharing and conjoint implementation by the tax-authorities across the globe. Only time will prove if such shared tax-assessment can be achieved in practice, despite the policy level alignment of the participating countries.
- uncertainty on the process and outcome await the Indian tax authorities and businesses covered under these pillars.
- concerns remain on the limited ‘scope’ of these pillars. By design, the two pillars cover a small class of taxpayers—MNEs which have a global turnover above 20 billion euros and net profitability above 10% for Pillar One.
- accepting the two-pillar solution is a trade-off, of taxing the big to spare the poor. This sounds wise on a progressive-taxation scale and horizontal equity ideal but may not be fair since it is not necessary that the biggest MNEs earn from India more and it also discounts the possibility of taxing the smaller MNEs who earn big from India.
- India joined OECD members in endorsing the global tax reform – in principle – on July 1 and has committed to working towards the deal’s final approval.
- 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 2021.
- 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, the need to seriously address the issue of cross border profit shifting and need for subject to tax rule to stop treaty shopping.
About Base Erosion and Profit shifting
Base erosion and profit shifting refers to the phenomenon where companies shift their profits to other tax jurisdictions, which usually have lower rates, thereby eroding the tax base in India.
BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises. Estimates since 2013 conservatively indicate annual losses of anywhere from 4 to10 per cent of global corporate income tax revenues, or $100-$240 billion annually.