Multinational digital companies will have to pay a minimum tax rate of 15% in 136 countries including India after a new tax deal was finalised by the Organisation for Economic Co-operation and Development (OECD), the organisation announced in a press release on October 8.
The deal is estimated to reallocate USD 125 billion in profits from 100 multinational companies to countries across the world, the press release said.
Digital taxes have been a sticking point for many jurisdictions trying to bring globalised digital services under the ambit of local tax laws. The OECD deal sets a common taxation framework that will reallocate taxes equitably among participating countries.
What is the OECD’s ‘Two-Pillar’ solution?
In order to distribute taxes equitably and limit the negotiating power of large digital companies, the OECD has devised a ‘two-pillar’ solution which involves 1) shifting taxing rights to the markets where profit is earned and 2) setting a floor for corporate income tax:
Pillar 1: Taxing rights for profits will be shifted from “home countries to the markets where they have business activities and earn profits,” under Pillar 1.
- Scope: Multinational enterprises (MNEs) with global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue).
- Timeline: The OECD aims to complete the procedure to put Pillar 1 in place by the end of 2022, including getting signatures on its multilateral convention and releasing model rules that countries can adopt to implement the plan.
- Impact: Taxing rights on at least USD 125 billion of profit are expected to be reallocated to market jurisdictions annually, OECD estimates. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
The taxation structure under Pillar 1 is segregated into two elements, Amount A and Amount B:
- Amount A: Under Amount A, 25% of residual profits earned by in-scope companies (above the 10% threshold) will be taxable in the jurisdictions in which the companies have markets, and not in their home countries.
- Amount B: Countries will devise a formula based on which marketing and distribution activities of the in-scope countries will be taxed under Amount B.
Pillar 2: While pillar one is focused on the re-allocation of taxable profits among countries, Pillar 2 “seeks to put a floor on competition over corporate income tax.” Under Pillar 2, the minimum tax rate applicable to in-scope companies will be 15%.
- Scope: Companies that meet the 750 million euro threshold determined by BEPS Action 13, excluding MNEs owned by governments or non-profits, will be within scope. Jurisdictions will be free to set the minimum floor even for companies that do not meet the threshold.
- Timeline: Pillar 2 should be brought into law in 2022, to be effective in 2023, according to the OECD statement.
- Impact: OECD estimates that measures included under Pillar 2 will generate US$150 billion in additional global tax revenues annually.
Through the two pillars, the OECD deal allocates more taxable profits to member countries and enables them to tax those profits under an agreed-upon tax rate.
How does India currently tax digital players, and when will it transition?
Under the OECD agreement, countries will need to eradicate all existing digital taxes to adopt the new tax framework. What does India currently charge MNEs, and will the OECD’s tax framework increase tax revenue for India?
The Equalisation levy: India introduced the Equalisation Levy in April 2020 as a 2-6% tax on foreign tech companies’ profits earned in India. This tax includes the following:
- A 2% tax on sales to customers based in India
- A 6% tax on payments for digital advertisements in India
- Sale of data on Indian residents to people residing elsewhere
According to an Economic Times report, India currently earns Rs. 4,000 crores in revenue from tech companies under the equalisation levy. To adopt the OECD’s common tax framework, the country would have to withdraw this tax.
The transition: While India has agreed to the OECD’s deal, the country will only forego the equalisation levy once the OECD’s tax framework is in effect in 2023-24, the Economic Times has reported. “India cannot suffer revenue losses in the intervening period until the contours of the framework are finalised,” a government official told ET.
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