India joined the G20-OECD inclusive framework deal that seeks to reform international tax rules and ensure that multinational enterprises pay their fair share wherever they operate, the finance ministry said on Friday.
However, India will have to roll back the equalisation levy that it imposes on companies such as Google, Amazon and Facebook when the global tax regime is implemented.
The OECD said signatories amounted to “130 countries and jurisdictions, representing more than 90% of global GDP.” Details of the regime and the implementation schedule will be drawn up in October, it added.
ET had reported last month that India favours a wider application of the law to ensure that the country won’t collect less under the proposed framework than it gets through the equalisation levy.
“The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets,” the finance ministry said. “Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed,” it said.
Two pillars of framework
The ministry called for “allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.”
The framework has two pillars, one dealing with transnational and digital companies and the other with low-tax jurisdictions to address cross-border profit shifting and treaty shopping.
The first pillar ensures that large multinational enterprises, including digital companies, pay tax where they operate and earn profits. Most such companies have so far been paying low taxes by shifting profits to low-tax jurisdictions. “Under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year,” the OECD said.
The second pillar seeks to put a floor under competition among countries through a global minimum corporate tax rate, currently proposed at 15%. This is expected to generate an additional $150 billion in tax revenues.
If implemented, countries such as the Netherlands and Luxembourg that offer lower tax rates, and so-called tax havens such as Bahamas or British Virgin Islands, could lose their sheen.
In 2016, India imposed an equalisation levy of 6% on online advertisement services provided by non-residents. This was applicable to Google and other foreign online advertising service providers.
The government expanded its scope from April 1, 2020, by imposing a 2% equalisation levy on digital transactions by foreign entities operating in India or having access to the local market.
Revenue under the levy for the last financial year amounted to Rs 1,492 crore until January 30, about 30% more than the Rs 1,136.5 crore collected in FY20. This levy will have to be withdrawn under the new regime expected to be rolled out in 2023.
Experts said India will need to evaluate the revenue expected under the new rules against what it gets from the equalisation levy, besides examining their applicability.
“One would eagerly await the final outcome as well as the minimum global tax rate that is finally agreed as against proposed 15%,” said Sanjay Sanghvi, partner at law firm Khaitan & Co.
In the first phase, the levy is proposed to cover only the top 100 multinationals with more than 20 billion euros in revenue and profitability above 10%. It will apply in market jurisdictions where the entity derives at least 1 million euros of revenue.
“Will India be able to continue to levy EL (equalisation levy) on those companies which are not covered by this–remains to be seen,” said international taxation specialist Daksha Baxi, founder of SRI Solutions.