OECD-Tax Deal

Subject: IR

Section: International Conventions

Why in News?

OECD Initiative: The Organisation for Economic Cooperation and Development (OECD) has introduced a new multilateral convention to address tax challenges related to the digitalization and globalization of the economy.
Two-Pillar Solution: The convention is a part of the Two-Pillar Solution, which includes Pillar One for profit reallocation and Pillar Two for minimum tax and subject-to-tax rules.
Consensus Achieved: The Multilateral Convention (MLC) to implement Amount A of Pillar One reflects the consensus among 138-member countries.
Amount A of Pillar One: This component involves reallocating taxing rights to market jurisdictions for a share of the profits of the largest and most profitable multinational enterprises (MNEs), regardless of their physical presence.
Redistribution of Taxing Rights: The MLC’s ‘Amount A’ deals with the reallocation of taxing rights over 25% of the residual profit of the most prominent MNEs to the jurisdictions where their customers are located.

Base Erosion and Profit Shifting (BEPS):

BEPS involves tax planning strategies used by multinational enterprises to exploit gaps in tax regulations, resulting in substantial tax avoidance.
The term “erosion” signifies the reduction or weakening of the tax base in higher-tax jurisdictions.
Certain corporate tax havens facilitate BEPS mechanisms, allowing companies to move profits to these havens and further avoid paying taxes even within these jurisdictions.
BEPS strategies have been attributed predominantly to American technology and life science multinationals.
Developing countries are disproportionately affected by BEPS due to their reliance on corporate income tax, leading to annual revenue losses estimated at USD 100-240 billion.

Base Erosion and Profit Shifting (BEPS) Action Plan 13:

The OECD has devised an Action Plan, known as “Base Erosion and Profit Shifting (BEPS) Action Plan 13,” aimed at ensuring that multinational enterprises accurately report their profits in the countries where they are earned.

Country-by-Country (CbC) Report:

The BEPS Action 13 report (Transfer Pricing Documentation and Country-by-Country Reporting) requires multinational enterprises (MNEs) to annually report specific information for each tax jurisdiction in which they conduct business. This report is known as the Country-by-Country (CbC) Report.

Two Pillars of the BEPS Framework:

Dealing with Transnational and Digital Companies: This pillar focuses on ensuring that multinational enterprises, especially digital companies, pay taxes in the jurisdictions where they operate and generate profits.
Dealing with Low-Tax Jurisdictions: This pillar aims to establish a global minimum corporate tax rate, currently proposed at 15%, to prevent cross-border profit shifting and treaty shopping among low-tax countries.

About Amount A of Pillar One

Amount A of Pillar One is a proposed solution as part of the OECD’s two-pillar approach to address the tax challenges arising from the digitalization and globalization of the economy.
It aims to reallocate a share of profits from the largest and most profitable multinational enterprises (MNEs) to the market jurisdictions where they operate, irrespective of their physical presence.
This serves as a means to ensure that these companies pay taxes in the countries where they generate revenue, thereby preventing profit shifting and ensuring a fair distribution of tax obligations.

Expected Outcomes:

Countries offering lower tax rates and traditional tax havens might face a decline in their attractiveness if the framework is implemented.

Impact on India:

India may need to withdraw the equalization levy imposed on multinational companies such as Google, Amazon, and Facebook once the global tax framework is enforced.

India’s Involvement:

India ratified the Multilateral Convention to Implement Tax Treaty-Related Measures in July 2019, demonstrating its commitment to curbing BEPS.

Overview of the Multilateral Convention:

The convention is a result of the OECD/G20 BEPS Project and aims to address base erosion and profit shifting through tax planning strategies that exploit gaps in tax regulations.
It focuses on preventing treaty abuse and resolving disputes through the Mutual Agreement Procedure, implementing two minimum standards.
This Convention works in conjunction with existing tax treaties, altering their application to enforce the BEPS measures effectively.
While ensuring consistency and certainty in BEPS implementation, it also offers flexibility for countries to exclude specific tax treaties and opt-out of certain provisions through reservations.

Equalization Levy:

India introduced a 6% equalization levy on non-resident online advertisement services in 2016, later expanded to include a 2% levy on digital transactions by foreign entities accessing the Indian market.