The Organisation for Economic Co-operation and Development (OECD) on Monday published detailed rules to assist in the implementation of new international tax system, which will ensure multinational enterprises (MNEs) will be subject to a minimum 15 per cent tax rate from 2023.

India is one among 137 countries that are signatory to new global tax regime. These rules have come at a time when preparations are underway for the Budget for the next fiscal. This would imply that the Finance Ministry may take a cue from these rules to include similar provisions in the Finance Bill.

“They are drafted as model rules that provide a template that jurisdictions can translate into domestic law, which should assist them in implementing Pillar Two within the agreed time frame and in a co-ordinated manner,” OECD said.

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The rules define the scope and set out the mechanism for the Global Anti-Base Erosion (GloBE) Rules under Pillar Two. These will assist countries to bring the GloBE rules into domestic legislation in 2022. The minimum tax will apply to MNEs with revenue above €750 million and is estimated to generate around $150 billion in additional global tax revenues annually.

Two-pillar solution

“The model rules released today are a significant building-block in the development of a two-pillar solution, converting the foundations of a political agreement reached in October into enforceable rules,” Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said.

Amit Maheshwari, Tax Partner, AKM Global, said the model rules have kept the primary scope same as annual revenue of € 750 million for constituent entities that are members of an MNE Group with exclusions for a governmental entity, an international organisation, a non-profit prganisation, a pension fund, an investment fund that is an ultimate parent entity, and a real estate investment vehicle that is an ultimate parent entity etc.

More compliance

The term ‘Permanent establishment’ has been defined as well under the model rules. It has surely added more compliance for MNEs in terms GloBE Information Return to be furnished with the tax administration in order to provide information on the tax calculations made by the MNE under the GloBE Rules no later than 15 months after the last day of the Reporting Fiscal Year.

“In case of a first transition year, GloBE return can be filed no later than 18 months after the last day of the reporting fiscal year. Additionally, the manner prescribed for the calculation of effective tax rate, Top-up tax etc. would certainly increase the calculations of MNEs from a tax standpoint,” he said.

Aravind Srivatsan, Tax Leader & Partner, Nangia Andersen LLP, said that a beginning has been made and for MNE groups, government needs to quickly spell out their positions to allow corporates to evaluate and critique their group structure and start building compliance framework.

“India hopes to make gains from Pillar Two over Pillar 1 and have informally expressed preference to apply STTR on base erosion payments; we expect the Budget 2022 to provide the heavy lifting on India’s position to to jump start the practical application of the template and give life to these rules,” he said.

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