International Taxation Rules Reform

International Taxation Rules Reform

Subject – Economy

Context – ‘India will not be on the losing side’ – officials at the Finance Ministry

Concept –

• On July 1, the Organisation for Economic Co-operation and Development (OECD) announced that 130 countries and jurisdictions, including India, have joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
• The timeline for the conclusion of the negotiations includes an October 2021 deadline for the remaining technical work on the two-pillar approach, as well as a plan for the effective implementation in 2023
• India and the majority of the members of OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) joined a new two-pillar plan to reform international taxation rules.
• The two-pillar plan – inclusive framework tax deal on Base Erosion and Profit Shifting (BEPS)- seeks to reform international tax rules and ensure that multinational enterprises pay their fair share wherever they operate.
• The new framework seeks to address the tax challenges arising from the digitalisation of economies.
• Two Pillar Plan:
  • Pillar One:
    • It will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies.
    • It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
    • According to OECD, more than USD 100 billion of profit are expected to be reallocated to market jurisdictions each year.
  • Pillar Two: It is about minimum tax and subject-to-tax rules (All sources of income liable to tax without taking account of tax allowances).
    • It seeks to put a minimum standard tax rate among countries through a global minimum corporate tax rate, currently proposed at 15%.
    • This is expected to generate an additional USD 150 billion in tax revenues.
  • Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations, said the OECD.

Equalisation Levy (EL)

• Introduced in 2016, also known as ‘Google Tax’, EL was initially applicable to payments for digital advertisement services received by non-resident companies without a permanent establishment here, if these exceeded ₹1 lakh a year.
• The rate of tax was 6 per cent.
• The companies using these services are required to withhold the tax amount.
• In the 2020-21 Budget, the government widened the ambit of the levy by including e-commerce companies.
• The applicable tax rate is two per cent (plus a surcharge) on amount of consideration received/receivable by an e-commerce operator. This came into effect from April 1 this year.