“Today’s tax deal was meant to end tax havens for good. Instead, it was written by them,” Susana Ruiz, Oxfam’s tax policy lead, said in a press release referring to the deal facilitated by the Organisation for Economic Co-operation and Development (OECD), and signed by 136 countries including India.
The deal, which aims to create a tax system for a ‘digitalised and globalised world economy’ claims to 1) shift taxing rights to the markets where profit is earned and 2) set a floor for corporate income tax applicable to large multinationals.
OECD claims the deal will bring more revenue to developing countries by taxing big tech equitably. Oxfam and other critics, however, point to worrying loopholes in the deal, arguing that the concerns of developing countries weren’t adequately addressed.
Deal is not good enough for developing countries, critics say
Critics of the deal point to the number of exemptions given to large tech corporations, and the low minimum tax rate of 15%:
- Oxfam: Susana Ruiz, the tax policy lead at Oxfam said, “This deal is a shameful and dangerous capitulation to the low-tax model of nations like Ireland… The tax devil is in the details, including a complex web of exemptions that could let big offenders like Amazon off the hook. At the last minute a colossal 10-year grace period was slapped onto the global corporate tax of 15 percent, and additional loopholes leave it with practically no teeth.”
- Global Alliance for Tax Justice: “The agreed global minimum tax rate of 15% in Pillar 2 is far lower than the world corporate income tax rate average of approximately 25% and closer to the 12.5% proposed by some low/no tax jurisdictions … Instead of stopping the race to the bottom tax competition, this low rate will put countries with a higher corporate income tax rate into a race to the minimum,” said a statement from the Global Alliance for Tax Justice, signed by over 250 civil society organisations including the Indian Social Action Forum.
What does the OECD deal say?
In order to distribute taxes equitably and limit the negotiating power of large digital companies, the OECD has devised a ‘two-pillar’ solution:
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.
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.
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.
Transition Period: Starting out, the taxes would only be partially applicable and take effect fully only at the end of a 10-year transition period.
Will the deal be beneficial for India?
India already taxes multinational companies operating in India using the equalisation levy. To adopt OECD’s solution, it would have to forego tax revenue from the levy:
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
The levy is applicable to smaller MNCs, whereas the OECD deal only targets larger firms. Foregoing this revenue might mean that India would have to bear a loss in the short-term, says Ashok Shah, founding partner of tax firm NA Shah and Associates:
In short term it is possible that India may lose tax on account of removal of equalisation levy which is currently applicable on MNC having turnover from India in excess of INR 2 crore whereas reallocation of profit will apply only in respect of MNC having global turnover in excess of 20 billion Euro. — Ashok Shah
What India should push for: Shah recommends that India should push for at least two demands in future negotiations under the OECD deal to mitigate any tax loss from the removal of the equalisation levy:
- A reduced global turnover threshold: “India should demand a reduced global turnover of MNC, which is currently proposed at 20 billion Euro (Rs. 1741 crores approx.),” Shah says. This would enable India to collect taxes from mid-sized MNCs, and not just the handful of large corporations.
- Increased profit allocation: Currently, only 25% of the profits beyond 10% of global companies will be reallocated for tax rights. Shah believes that India should ask for this number to be higher: “This way India will be able to compensate the tax loss on account of removal of equalisation levy,” he says.
- Google, Facebook, Netflix Will Pay At Least 15% Tax In 136 Countries Including India
- Tech Firms In Ireland Like Google, Facebook To Cough Up More Under New Tax Framework
- OECD Warns Of Trade War Without Global Consensus On Digital Tax, Deal Now Possible In Mid-2021
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