Rapidly evolving international tax norms are keeping even the Indian multi national companies (MNCs) on the edge. This affects companies whose group turnover exceeds Euro 750mn (in-scope companies). Certain sectors will be excluded. This is a story evolving for some time and last week G7 agreed on a tax deal which is considered as a major step in the right direction, although lot more remains to be achieved.
OECD Inclusive Framework, consisting of more than 137 countries, released Blueprints on Pillar One (P1) and Two (P2) last October. P1 focuses on challenges arising from digitalised economy and deals with profits from Automated Digital Services (ADS) and Consumer Facing Business (CFB). P1 gives new taxing right to market jurisdictions even if there no permanent establishment in such country. Market jurisdictions will be allowed to tax 20 percent of profits (non-routine) of the group in excess of 10 percent of margin (routine).
P2 addresses menace of reducing tax rates creating race to bottom. As per P2 proposal the in-scope companies must pay minimum tax (agreed at 15 percent by G7) on their income. This is achieved through four interconnected rules. The US proposal differs from the P1, P2 proposals.
The agreement reached last week is only between G7 countries. The Inclusive Framework has more than 137 countries and they are trying to achieve consensus-based solution. Various countries have started expressing their concerns.
Countries such as Hungary, Ireland, Poland have expressed discomfort with minimum rate of tax. The expectation is a carve-out from P2 where substantial economic activities are happening in the country. While P2 contains some carve-outs, the US proposal appears to be different. China and UK have also indicated that certain sectors need to be excluded from the scope of P2.
Interesting observations are made about minimum tax and sovereignty. While one set argument is that 15 percent rate helps the countries protecting sovereignty, other argue that it is the prerogative of every country to decide tax rate for its territory. P2 proposal, released in October 2020 Blueprint, as such does not directly compel the country to levy tax at minimum 15 percent. Every country can decide its own tax rate, but if the jurisdictional effective tax rate (ETR) is below minimum, the balance tax can be collected by another country from a group entity.
As per the US proposal, the scope of P1 would be restricted to top 100 most profitable companies deriving intangible based profits. Further, its scoping would be comprehensive as against only ADS or CFB. It would be interesting to see how India and other countries react to this. While US proposal is to cover only top 100 MNE groups, as per the P1 Blueprint, 8,000 groups cross the threshold of Euro 750mn of which about 2,300 groups have ADS / CFB revenue. The expectations of countries withdrawing digital services tax may face hurdles if applicability of P1 is restricted to only 100 MNE groups.
Suspension of tariffs levied under USTR proceedings for 180 days suggests an expectation of faster international consensus. The next meeting of the Inclusive Framework is scheduled on June 30-July 1 and the meeting of the G20 finance ministers is scheduled on July 10-11. Accordingly, fair amount of clarity can be expected on these issues in next couple of months.
(The writer is Partner with Deloitte Haskins and Sells LLP)