Global Minimum Tax: India, U.S. Agree On Transition Mechanism

India and the U.S. have agreed on a transition mechanism from the current equalisation levy, known as digital tax that's levied in the country, to a global minimum tax.

The two nations have agreed to adopt the same mechanism which the U.S. signed on Oct. 21 with five other countries. The October agreement was signed between the U.S., U.K., France, Italy, Spain and Austria.

"This is a commendable move of the Indian government and will ensure the corporates will get to pay fair taxes starting 2022 irrespective of the actual implementation of Pillar 1," Rakesh Nangia, chairman of Nangia Andersen India, said.

Under the Oct. 21 agreement, the European countries have retained for now the so-called digital services tax on technology giants like Facebook Inc. and Amazon.com Inc., which U.S. officials said were being unfairly discriminated against.

If and when a new global tax regime comes into force in the next two years, the European countries will offer a credit to refund any taxes collected in excess of what corporations would pay under the global tax deal.

For its part, the U.S. agreed to drop retaliatory tariffs it had enacted against the five European nations.

The same modalities will now govern the transition to global minimum tax between India and U.S., a statement by the Press Information Bureau said.

Essentially the terms call for a status quo on any retaliatory measures pending the implementation of the Pillar 1 solution, Rohinton Sidhwa, partner at Deloitte India, said.

Currently, Pillar 1 of the global tax reform agreement covers multinational enterprises with global sales above 20 billion euros and profitability above 10%. As much as 25% of their residual profit, in excess of 10% of revenue, will be allocated to market jurisdictions based on new special purpose nexus rule.

"The statement means that no relief may be offered to U.S. Multinational Enterprises that are subject to equalisation levy but don't fall under the 20 billion euros threshold under Pillar 1," Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co., said.

The applicable period for the transition will be from April 1, 2022, to implementation of Pillar 1 or March 31, 2024, whichever is earlier.

The final terms of the agreement shall be finalised by Feb. 1, 2022, the PIB statement said.