OECD/G20 global tax deal: India says ‘consensus agreement’ likely by October

The new framework also seeks to address concerns over cross-border profit shifting and bring in subject-to-tax rule to stop treaty shopping.

India and majority of the members OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have adopted outline of a consensus solution to address the tax challenges arising from the digitalisation of economies.

The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets and consideration of demand side factors in profit allocation. The new framework also seeks to address concerns over cross-border profit shifting and bring in subject-to-tax rule to stop treaty shopping.

The proposed solution consists of two components: Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules.

“Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed. Further, the technical details of the proposal will be worked out in the coming months and a consensus agreement is expected by October,” union finance ministry said in a statement.

“The solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies. India will continue to be constructively engaged for reaching a consensus based ready to implement solution with Pillar one and Pillar two as a package by October and contribute positively for the advancement of the international tax agenda.”

Consensus reached by OECD Inclusive Framework among 130+ members on two pillar solutions is undeniably a colossal outcome, and will accelerate the ongoing efforts to reset of nearly a century-old international tax rules enshrined in bilateral tax treaties, analysts said.

“Latest agreement on Pillar 1 solution provides an objective in-scope definition for largest (sales >20bn Euro) and most profitable (>10% global profitability) MNEs to be subject to new nexus and profit allocation rules,” said Sumit Singhania, Partner, Deloitte India. A 20 to 30% allocation of super normal profits to market jurisdictions is definitely a decent bargain for large number of source jurisdictions, Singhania said.

The finality dawning on multilateral negotiations also will pave way for phase out of unilateral measures like digital service tax and any like measure such as Equalisation levy in India context.

“The latest negotiations on Pillar two has led to a balanced outcome with an agreement on 15% minimum tax, that is touch higher than rates indicated under OECD modelling a few months ago. This consensus on min tax would hopefully inspire much spirited participation as OECD gives finishing touches to implementation plan by ironing out issues under GloBE rules in next few months. On the flip side, timelines for both Pillars to come into effect from 2023, does appear a touch ambitious and within that, MNEs will have a lot of work to do to gear up to the new global tax rules,” he added.