One of the expectations from the Budget was the likely announcement of the Pillar Two law. However, that was not to be. The raises questions on whether India-based multinational enterprises (MNEs, or MNCs) will be absolved of Pillar Two related compliances.
Pillar Two is a part of the two-pillar solution developed by the Organization for Economic Cooperation and Development (OECD) Inclusive Framework (comprising 147 countries) to combat the issue of Base Erosion and Profit Shifting (BEPS). It seeks to ensure that MNEs, with consolidated annual revenues of €750 million or more, pay at least 15 per cent tax in each jurisdiction they operate in. To achieve this, any top-up tax (that is, the ‘top-up’ amount needed to bring the overall tax on the profits in each jurisdiction up to the minimum Effective Tax Rate (ETR) of 15 per cent) will be collected through the Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR) or through Qualified Domestic Minimum Top-up Tax (QDMTT).
Budget 2024 proposes the withdrawal of the 2 per cent Equalization Levy (EQL) on overseas e-commerce supplies or services. In the post-Budget briefing, the Finance Minister clarified that India is close to finalising the global negotiations on Pillar One and Pillar Two and has hence withdrawn EQL. More than 30 countries have adopted the Pillar Two law into their legislation (“implementing countries”), but there has been no policy announcement on Pillar Two so far in India.
Impact analysis
Despite the lack of a formal announcement, India-based MNEs, having presence in implementing countries, will be required to undertake Pillar Two related compliances. Assume an India-based MNE has revenue of more than €750 million with subsidiaries in the UK, the UAE and Bangladesh. Since the UK has incorporated Pillar Two law, the group is in scope of Pillar Two and is required to calculate Pillar Two ETR for each of the four countries. In case the ETR of any of the four countries, including India, is less than 15 per cent, a ‘top-up tax’ liability under Pillar Two could arise. That India and the UAE have not adopted Pillar Two and Bangladesh is not an Inclusive Framework member, is not relevant. This would require the Indian MNE group to undertake an immediate impact analysis of the Pillar Two law and provide for “top-up taxes”, if any, in its consolidated books of account.
Though India has not yet notified mandatory disclosure of Pillar Two impact in its financial statements, most countries have mandated such disclosures under the IFRS/local country GAAP standards. It would be ideal for an Indian MNE to undertake such disclosures in its financial statements if it is likely to have a “top-up tax” in the implementing countries.
Recently, Belgium has come up with a mandatory Pillar Two registration requirement for in-scope MNE groups, having any presence in Belgium. Similar requirement has also been brought in by the UK. Indian MNEs with a presence in Belgium/UK will have to obtain Pillar Two registrations and undertake compliances. Other implementing countries are also likely to follow suit and come up with the requirement of obtaining Pillar Two registrations
Indian MNEs will also be required to file GloBE Information Returns (GIR) in the implementing countries within 15 months, after the end of the fiscal year (18 months for the transitional year), even in absence of any such requirement in India. A QDMTT local tax return filing will likely also be needed in jurisdictions where QDMTT is in place.
With the abolition of 2 per cent EQL, India has indicated its commitment to two-pillar solutions. The absence of Pillar Two announcement in the Budget does not absolve Indian MNEs from Pillar Two compliances elsewhere.
The writer is Partner, Deloitte India