OECD-G20 global tax deal: India says 'consensus agreement' likely by October

A day after joining the OECD-G20 framework for global minimum tax, the Finance Ministry on Friday said some significant issues including share of profit allocation and scope of subject to tax rules are yet to be addressed and a ‘consensus agreement’ is expected by October after working out the technical details of the proposal.

Total 130 countries have agreed to an overhaul of global tax norms to ensure that multinationals pay taxes wherever they operate and at a minimum 15% rate.

India is in favour of a consensus solution that is simple to implement and simple to comply with. At the same time, the solution should result in the allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies, the Ministry said.

In a statement, the Finance Ministry said the majority of the members of OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (including India) adopted on June 2, a high-level statement containing an outline of a consensus solution to address the tax challenges arising from the digitalisation of the economy.

The proposed solution consists of two components — Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules.

“Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed. Further, the technical details of the proposal will be worked out in the coming months and a consensus agreement is expected by October,” the Ministry said.

The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets, consideration of demand-side factors in profit allocation, the need to seriously address the issue of cross-border profit shifting, and the need for subject to tax rule to stop treaty shopping.

“India is in favour of a consensus solution which is simple to implement and simple to comply. At the same time, the solution should result in the allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.

“India will continue to be constructively engaged for reaching a consensus-based ready to implement a solution with Pillar one and Pillar two as a package by October and contribute positively for the advancement of the international tax agenda,” it added.

Last month, a group of seven developed (G-7) countries, comprising the US, UK, Germany, France, Canada, Italy, and Japan, had reached a landmark deal on taxing multinational companies as per which the minimum global tax rate would be at least 15%.

They also agreed to put in place measures to ensure businesses pay taxes in the countries where they operate, a move aimed at plugging loopholes in cross-border taxation.

Following this, the Paris-based Organisation for Economic Cooperation and Development (OECD) on Thursday hosted talks on cross-border taxation of MNCs in which the majority of the countries, except Ireland and Hungary, agreed to sign the deal.

The G20 group of developed and emerging economies will discuss this on July 9-10 in Venice, Italy.

Deloitte India Partner Sumit Singhania said the consensus reached by OECD Inclusive Framework will accelerate the ongoing efforts to reset the nearly a century-old international tax rules enshrined in bilateral tax treaties “Latest agreement on Pillar 1 solution provides an objective in-scope definition for largest (sales more than 20 billion Euros) and most profitable (more than 10% global profitability) MNEs to be subject to new nexus and profit allocation rules. A 20 to 30% allocation of supernormal profits to market jurisdictions is definitely a decent bargain for a large number of source jurisdictions,” he added.

The finality dawning on multilateral negotiations will also pave the way for phasing out of unilateral measures like digital service tax and any like measure such as equalisation levy in India context.

Moreover, Pillar one will drive simpler cross-border tax compliances as taxes are to be allocated amongst jurisdictions through the central allocation formula, Singhania added.

“On the flip side, timelines for both Pillars to come into effect from 2023, does appear a touch ambitious and within that, multinational enterprises (MNEs) will have a lot of work to do to gear up to the new global tax rules,” he said.