Taxation of digital multinational companies that avoid paying taxes in the jurisdictions from where they earn a significant part of their revenues, citing lack of physical presence, has been a thorny issue for years. Similarly, many of the larger companies have been shifting their businesses to low-tax jurisdictions, depriving countries of their taxes. The global corporate tax agreement engineered by OECD and spearheaded by the US Treasury Secretary, Janet Yellen, puts forth a feasible solution to address these issues. The two pillars of the tax agreement try to distribute the taxation rights of digital MNCs equitably among countries from where revenue is earned and reduce profit shifting by MNCs to low tax jurisdictions. While a concerted attempt to address these concerns began in 2015 with the adoption of OECD’s Base Erosion and Profit Shifting package by 140 countries including India, this is the first time that almost all the countries have agreed to a uniform minimum rate of tax and a formula for distributing taxation rights.

Developing countries, including India, have played an active role in the inclusive framework and the proposals take into account the concerns of all stakeholders. The first proposal on distributing the right to tax digital MNCs had met with stiff opposition from many countries initially. But the formula proposed in the agreement was fair enough to convince almost all countries to agree to forfeit their existing revenue from equalisation levies.

The formula proposes that 25 per cent of residual profit, defined as profit in excess of 10 per cent of revenue — of MNCs with revenue above €20 billion — shall be taxed in jurisdictions where the revenue is earned. While India will have to cease its equalisation levy on foreign digital players, the right to tax the revenue earned by these companies in India is likely to compensate the loss to some extent. Of OECD’s estimate of possible reallocation of $125 billion of taxing rights, a significant portion is likely to accrue to India, given the demographic advantage. The second proposal — to impose minimum corporate tax rate of 15 per cent on MNCs with revenue over €750 million, will not impact India much since the domestic corporate tax rate is much higher. With new manufacturing units being taxed at a concessional rate of 15 per cent, the global rate will not act as a disincentive to future investors.

With 136 countries accounting for 90 per cent of the global GDP signing the agreement, there is likely to be substantial reduction in tax evasion following the implementation. Making low-tax jurisdictions such as Ireland, Estonia and Hungary join the deal paves the way for smooth implementation. That Kenya, Nigeria, Pakistan and Sri Lanka have not yet signed the deal is unlikely to impede the roll-out much. However, the last word has not yet been written on this, as national governments will have to ratify the deal. But the deal should be welcomed by all jurisdictions since it will help establish a more equitable global tax system and free countries from long drawn litigations with large MNCs.

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