India: Agreement on the overall minimum tax rate
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Traditionally, the taxation of corporate profits has been linked to a link rule based on physical presence. While this was sufficient in the traditional economy, the rapid digitization of the economy (with the growth of digital platforms like Facebook, Amazon, Netflix, Google, etc.) meant that existing tax rules were not sufficient in this regard. which concerns digital taxation. economy. Businesses no longer need a physical presence to derive economic benefits from a jurisdiction. This raised concerns for “market jurisdictions” with the customer / user base, which, in the absence of a taxing right, did not receive their fair share of tax revenues on income earned by businesses. offshore of their territory. While this problem was first identified some 20 years ago and has been the subject of deliberations since then, efforts and concrete actions in this direction have accelerated in recent years.
136 countries (out of 140 members of the OECD / G20 Inclusive Framework on Base Erosion and Profit Shifting, i.e. BEPS-IF) have joined the
Declaration on the two-pillar solution to tackle the fiscal challenges of the digitization of the economy(Declaration). This is a historic development in the global tax framework. It takes the development of July 2021 (July Declaration) a step further and not only reiterates the international commitment to ensure a fair international tax regime, but also attempts to put developing countries on an equal footing with the rest. of the world. Four countries that have not yet adhered to the Declaration are: Kenya, Nigeria, Pakistan and Sri Lanka.
The statement reflects the agreement on changes to the tax rules which are grouped into two “pillars” – the first and the second pillar.
- Amount A is a new taxing right for market jurisdictions (c.
(* Note: In the July statement, it was mentioned that 20% to 30% of these residual profits would be allocated to market jurisdictions.)
- Amount B aims to standardize the remuneration of affiliated distributors who perform core marketing and distribution activities in an arm’s length manner. Amount B aims to simplify transfer pricing rules and enhance tax security.
- To supply tax security, a binding elective dispute resolution mechanism will be available * for A-Amount issues for developing economies.
(* Note: In the July statement, it was only mentioned that a mandatory and elective dispute resolution mechanism would be considered.)
- The Declaration also provides that countries will be required to withdraw * all Taxes on digital services and other similar measures relevant to all companies, and to undertake not to introduce such measures in the future. No newly enacted digital services tax or other relevant similar measure will be imposed on a company from October 8, 2021 and until December 31, 2023 or the entry into force of the Multilateral Implementation Convention at the earliest. (MLC).
(* Note: In the July statement it was only mentioned that the implementation package would ensure proper coordination between the application of the new international tax rules and the removal of all taxes on digital services and other measures similar relevant across all companies.)
This is a historic development in the field of international taxation to ensure a fair distribution of tax rights between countries. Under the first pillar, the rights to tax over $ 125 billion in profits are expected to be reallocated to market jurisdictions each year. In addition, the new minimum tax rate under the second pillar is expected to generate around $ 150 billion in additional global tax revenue each year. That said, it appears that as part of this global commitment India will have to forgo its “Equalization Levy” (commonly known as Google Tax). These developments are expected to come into effect in 2023. Therefore, progress on this front should be closely monitored.
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