Viewpoint: India needs to strengthen its tax administration, while ensuring it receives a larger share of the global tax base

India has joined pressure from administration Joe Biden for a global corporate tax framework – since endorsed by G20 leaders in Rome last weekend – while getting a better deal than some previous members . It has been spared conditionalities on how it should dismantle its digital tax, the equalization tax (EL). This will make the transition less painful for India, unlike countries in Europe.

The initiative calls for a global minimum levy of 15%, enshrining the right of countries to tax the profits of large multinationals where they do business or have customers, but have no physical presence. In return, India and other countries will remove their digital taxes aimed primarily at large US tech companies like Alphabet (Google), Meta (Facebook) and Amazon.

Five European countries – France, Austria, France, Italy and Spain – as well as Great Britain, are now bound by a pact with the United States on the timing and method of their tax withdrawal digital. And the United States has withdrawn the threat of tariffs against these countries. The objective of the pact, signed upstream of the G20, is to manage the transition to the new global tax regime for highly profitable companies. India and Turkey were excluded from the pact.

Under the deal, European countries will be able to keep their digital taxes in place until the global tax deal goes into effect in 2023. However, any levies they collect from multinationals after January 2022 that exceed what they would have to pay under the new rules would be credited against the future tax debts of these companies in these (European) countries. Since there are no such endorsements for India, GoI could keep whatever digital taxes it collects until the new deal goes into effect. It is a relief.

Nirmala Sitharaman has confirmed that India will withdraw EL, aka the “Google tax,” once the global tax reform agreement is implemented. Last month, she said the tax was introduced at a time when the world had yet to agree to tax reform to tackle large digital companies dodging tax in several countries, despite large revenues from their clients. the low.

While waiting for the windfall

Initially, EL was billed on online advertising payments to foreign entities and later on non-resident e-commerce operators without a “permanent establishment” (PE) here. It served a principle of taxation – neutrality – ending the arrangement in which foreign-based companies escaped taxation while domestic companies were taxed. The idea was also to give Indian digital companies a level playing field, rather than harming Digital India, as some foreign targets of the tax had initially claimed. It was fair enough.

EL has also helped spur the concerted global movement to end Base Erosion and Profit Shifting (BEPS) by multinationals. It has yet to produce a gold mine for the government.

India is now thirsty for income to revive the economy. However, having concluded the global pact on the taxation of highly profitable companies, including digital giants, the GoI should not attempt to extend the reach of EL.

Hopefully the global deal, backed by the OECD, will benefit India in the long run. The agreement is twofold: Pillar 1 gives countries the right to tax a slice of multinational profits above a certain “routine level”. For example, if Google’s overall profit or sales is 15%, a quarter of 5% of sales, i.e. 1.25% of sales, would be available for distribution in countries where sales are carried out (regardless of the PE). It is estimated that $ 125 billion (9.31 lakh crore) in profits would be available for taxation. The breakdown by country is still being worked out.

Under Pillar 2, companies with a minimum turnover of 750 million euros (approximately $ 865 million, or 6,453 crore yen) will have to pay a minimum corporate tax of 15% on profits. that they carry out in each country. It will bring in around $ 150 billion (11.2 lakh crore) in new revenue per year. Over 150 companies based in India will be covered by pillar 2.

Thus, India should negotiate hard while working out the finer details of how distributable profits are to be calculated (and which country should forgo profits). Akhilesh Ranjan, a former member of the Central Direct Taxation Council (CBDT), believes India needs to be vigilant as it could end up waiving taxes on profits made by certain subsidiaries of multinationals, especially in the business sector. ‘infotech.

Overall, the reform, which is to be implemented through binding multilateral tax pacts, will deter multinationals from using differences in tax rules to shift profits to tax havens and prevent BEPS, thereby helping companies. governments to collect more taxes. Some 136 countries, representing more than 90% of global GDP, have signed the agreement negotiated by the OECD.

The pie in the sky

Poorer countries like Nigeria and Kenya have not joined, saying the plan to reallocate the right to tax a slice of multinational corporations’ profits above a ‘routine level’ is far too complex, taking into account sub-optimal income gains. Their concerns must be allayed.

The OECD must quickly develop the model rules to ensure the implementation of tax reform by 2023. To prepare for the transition, India must strengthen its tax administration, while ensuring that it receives a bigger share of the tax pie.

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