India along with 135 countries agreed on Friday to implement new international tax system. This aims to ensure that Multinational Enterprises (MNEs) will be subject to a minimum 15 per cent tax rate from 2023.

“Today’s agreement will make our international tax arrangements fairer and work better,” OECD (Organisation for Economic Co-operation and Development) Secretary-General Mathias Cormann said. Further he termed the agreement as a major victory for effective and balanced multilateralism. “It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” he said.

These 136 countries and jurisdictions represent more than 90 per cent of global GDP. The deal will reallocate more than $125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.

Two-pillar solution

The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington DC on October 13, then to the G20 Leaders Summit in Rome at the end of the month. Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.

Specifically, multinational enterprises with global sales above EUR 20 billion and profitability above 10 per cent - that can be considered as the winners of globalisation - will be covered by the new rules, with 25 per cent of profit above the 10 per cent threshold to be reallocated to market jurisdictions,” the statement said while adding that taxing rights on more than $ 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.

Pillar Two introduces a global minimum corporate tax rate set at 15 per cent. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around $ 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers.

Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention is already under development and will be the vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures. This will bring more certainty and help ease trade tensions.

Commenting on the development, Yashesh Ashar, Partner at Bhuta Shah & Co LLP feels that post signing of the global tax deal, and once the mutual consensus is reached between the nations, India may have to withdraw the concept of equalization levy (digital tax) from the law. It is pertinent to note the the equalization levy is on gross payment whereas the Pillar 2 Tax, speaks about tax on residual profit; and equalization levy applies to almost all the companies whereas the new tax agreement is only on the major tech-giants “Further, India being a large market, provides huge business opportunities to the tech giants across the globe. Therefore, India should get a fair share of tax revenue,” he said.

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