By Stella Joseph and Rushil Shah
On October 8, 2021, a “landmark” deal was reached amongst more than 130 countries where the broad contours of Two Pillar Solution to Address the Tax Challenges arising from the Digitization of the Economy was finalised (“October Statement”).
The key impetus of these global negotiations was to stop digital services taxes from being imposed by different countries unilaterally. In keeping with this objective, on October 21, a Joint Statement was issued between US and Austria, France, Italy, Spain, and United Kingdom (“Unilateral Measures Compromise”). An interim measure was agreed between these countries as regards withdrawal of “Unilateral Measures” and a commitment from the US for not initiating any trade action under Section 301.
Now, finally, there is also an agreement between US and India, as regards to the interim arrangement, till the time the Global Tax Deal is put in place.
Significantly, during Ambassador Katherine Tai’s (United States Trade Representative) recent visit to India, the agenda of this interim agreement was taken up. As a result, on November 24, the government of India gave a press release in terms of which it has been agreed between the US and India that the “same terms that apply under the 21st October Joint Statement shall apply between the United States and India with respect to India’s charge of 2% equalization levy on e-commerce supply of services and the US trade action regarding the said Equalisation Levy” (“India US Interim Arrangement”). The press release further states that the final terms of the Agreement shall be finalised by February 1, 2022.
What are the terms agreed upon by both sides?
While one awaits the final text of this interim arrangement, certain aspects are worth considering:
- Interim Period as per financial year: The understanding of “Interim Period” under the Unilateral Measures Compromise is different from that under the India US Interim Arrangement. The “Interim Period” under the Unilateral Measures Compromise begins on January 1, 2022 and ends on the date the Pillar 1 multilateral convention comes into force or December 31, 2023 (whichever is earlier). The “Interim Period” under the India US Interim Arrangement will be April 1, 2022 till the implementation of Pillar One or March 31, 2024, whichever is earlier. This is taking into account the concept of “financial year” as recognised in India.
- The agreement only covers 2% levy: While the Unilateral Measures Compromise defines “Unilateral Measures” widely as “Digital Services Taxes and other relevant similar measures”, the India-US Interim Agreement only covers the 2% Equalisation Levy of 2020. This is logical since the USTR action was initiated only in relation to the 2% Equalisation Levy and thus this Interim Agreement speaks of a commitment from the US to not initiate any trade measure in relation to such 2% Equalisation Levy.
What does this mean for tech multinationals?
For the entities which will be covered under Pillar One (whose global turnover crosses the threshold of € 20 billion, with the profitability of above 10%) i.e. about 100 ultra-profitable MNEs, will be required to pay a 2% Equalisation Levy on e-commerce supply of services made to Indian customers (and to non-residents in certain situations) during the Interim Period. If the quantum of this Equalisation Levy exceeds the “Amount A” computed under Pillar One, then such an entity would be eligible to take credit of the same (as per the prescribed prorated manner) and its corporate income tax in India arising from the new taxing right under Pillar 1 would get reduced to that extent.
- For entities other than the above, i.e for a majority of the MNEs, 2% Equalisation Levy will continue to be applicable on e-commerce supply of goods and services, until the implementation of Pillar One. Thereafter, in terms of India’s commitment to the October Statement, the said Equalisation Levy should ideally be withdrawn for all companies.
- Since the US-India Interim Agreement does not speak generally of “Digital Services Taxes and other relevant similar measures” but only “2% equalization levy on e-commerce supply of services”, it does not impact the 6% equalization levy which was imposed in 2016 on online advertisements. Thus, as regards the 6% Equalisation Levy, the ultra-profitable MNEs covered under Pillar One would not be able to avail any interim credit once Pillar One gets implemented. The other MNEs would in any case continue to pay the 6% Equalisation Levy till Pillar One is implemented.
- Once Pillar One is implemented, whether the 6% Equalisation Levy would be withdrawn will have to be seen. Since the October Statement speaks of withdrawal of “all Digital Services Taxes and other relevant similar measures”, it should ideally also result in withdrawal of 6% Equalisation Levy on online advertisement services.
The continual developments in relation to this significant global tax deal will have to be closely monitored and assessed, to gauge the impact on digital businesses.
Stella Joseph is a Partner and Rushil Shah is a Senior Associate at Economic Laws Practice. Views expressed here are personal and do not necessarily reflect the views of MediaNama.
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