GloBE rules Pillar II to come in action soon

GloBE rules Pillar II to come in action soon

Subject : Economy

Section: Fiscal Policy

Background:

• Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) emerged in 2015 in an effort to set rules for taxing international business income especially in the digitalised and globalised business environment.
• OECD’s BEPS 1.0, published in 2015, comprised 15 action plans that aimed to enhance transparency, prevent treaty abuse, align taxation with substance, and ensure that profits are taxed where the economic activities generating the profits are conducted and where value is created.
• India’s adoption of the equalisation levy, significant economic presence, interest limitation rules, and country-by-country reporting (CbCR) under BEPS 1.0 aimed to capture tax revenues from the digital economy and prevent profit shifting.
• BEPS 1.0 Action Plans while changing the international tax systems to a certain extent failed in addressing the tax challenges arising from the digitalisation of the economy.
• To achieve the unfinished work of BEPS 1.0 the Global Anti-Base Erosion (GloBE) Rules Pillar One It proposes to tax large multi-national enterprises (MNEs), defined as having a global turnover of more than 20 billion euros—in jurisdictions where they have a significant consumer presence, even if they lack a physical presence .
• Initially the Pillar One targeted MNEs engaged in the business of Automated Digital Services (ADS) and Consumer Facing Businesses (CFB), the revised framework issued in 2021 expanded the scope to all MNEs satisfying the turnover threshold criteria.
• Although the reforms are steered by the OECD, developing countries have been involved in it indirectly. An Inclusive Framework (IF) was formed by 142 countries (including India) and all of them, except Pakistan, Sri Lanka, and Nigeria, have come together to endorse the BEPS 2.0 proposals.
• India is an IF member and a signatory to the ‘common approach’, whereby it has committed to respect the rights of other IF countries to impose legitimate top-up taxes on eligible entities.

Relevance for India:

• It is not necessary under the Pillar Two-GloBE Rules for each IF jurisdiction to adopt the GloBE rules to trigger a compliance obligation for the MNEs. Thus these will be applicable to India too.
• The GloBE Rules have been framed and agreed to be applied as a ‘common approach’. This means that jurisdictions are not required to formerly adopt the GloBE rules, but if they choose to do so, they agree to implement and administer them in a way that is consistent with the agreed outcomes set out under those rules.
• One jurisdiction accepts the application of the GloBE Rules by another in respect of MNEs operating in its jurisdiction. This implies that India-headquartered MNEs having presence in jurisdictions which have already adopted the GloBE Rules need to gear up and be prepared to comply with the legislative provisions of the rules.