International taxation in general and taxing multinational enterprises in particular pose a challenge as an eclectic variety of factors unique to each country need to be considered. Hence, it is not surprising that the Base Erosion and Profit Sharing (BEPS) initiative of the Organisation for Economic Cooperation and Development (OECD) is still a work-in-progress despite having been proposed more than a decade ago. But now, more than 130 countries have consented on a global tax deal — which was being aggressively pushed by the US. India has also signed on the dotted line.
It has become a fashion for international tax proposals to be based on pillars — the new one has two pillars. Pillar One reallocates taxing rights to market countries through the creation of a new taxing right. A share of a group’s global residual profit will be reallocated to market countries using a formulaic approach. No physical presence is required in a market country to create a new nexus (taxable presence).
The G7 members have reached agreement that Amount A should apply to the “largest and most profitable” multinationals. Further clarity is needed in respect of the thresholds for determining businesses that are the largest and most profitable. In-scope businesses would reallocate at least 20-30 per cent of their residual profit above a 10 per cent profit level to market countries.
This is expected to be calculated as the ratio of profit before tax to revenue, as set out in the OECD Pillar One blueprint. Also, any Amount A liability would be allocated between “paying entities” and relieved via either exemption or credit. The G7 stresses that implementation will be coordinated with the removal of all Digital Services Taxes (DSTs) and other relevant similar measures.
The Pillar Two proposal comprises a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all countries. The OECD Pillar Two blueprint proposed that multinational groups with consolidated revenues of €750 million or more would be in scope. Where the tax on profits otherwise would be below an agreed minimum effective tax rate, the “income inclusion rule” would result in additional “top up” amounts of tax being payable by the ultimate parent entity of the group to its home country tax authority.
The “under-taxed payment rule” would apply as a secondary rule where the income inclusion rule has not been applied. It is expected that the minimum tax rate would be 15 per cent.
Initially, India had argued for an increase in the threshold (which was not accepted) so that a larger number of companies could be subjected to the tax. At present, India levies an equalisation levy on certain specified transactions — this will have to go once the new deal comes into place. India could stand to lose out some revenue since the equalisation levy is based on turnover while the new deal is based on profits which are hard to calculate for enterprises with multiple locations.
The requirements of accounting standards would also need to be reckoned, as different sets of accounting standards could reflect different profits. In addition, the nitty-gritty as to how much profit distribution should be done by the multinational enterprises (MNEs) towards market jurisdictions and what should be the basis of distribution of this carved out profit between market jurisdictions are yet to be known.
India would want to have a larger share of this as it possesses exactly what multinational e-commerce entities need — a large population who are glued to their phones/other devices all the time. With higher population and larger online hits, India would want that it gets a larger share of the residual profits that MNEs transfer to market jurisdictions. It is hoped that a workable solution will be found to this negotiations.
The writer is a chartered accountant