136 countries reach an agreement to distribute MNEs profits among customer-centric countries and introduce a minimum global tax rate of 15%


MUMBAI: You can say that history has just been made in the field of international taxation. One of the main reforms finalized today at a meeting of the Inclusive Framework under the umbrella of the Organization for Economic Cooperation and Development (Oecd) ensures that Multinational Enterprises (MNEs) will be subject to a minimum global tax rate of 15% from of 2023.
After years of intense negotiations, an agreement on the two-pillar solution was reached today between 136 countries and jurisdictions (which includes all OECD member countries and G20 countries). Four countries, Kenya, Nigeria, Pakistan and Sri Lanka, have yet to join the agreement. The solution will be delivered to the G20 finance ministers meeting in Washington DC on October 3 and will then be presented at the G20 Leaders Summit in Rome in late October.
Since its inception, India has been an active participant in these discussions. From the Indian revenue point of view, the first pillar, which grants tax rights and profit allocation to multinational companies to the countries where the customer base is located, regardless of whether the multinational companies have a physical presence, is of utmost importance. For example, highly digitized companies that do not require a physical footprint like Google and Facebook have a huge consumer base in India.
Under Pillar One, tax duties on more than $ 125 billion are expected to be reallocated from around 100 of the world’s largest and most profitable MNEs to market jurisdictions (countries where the customer base is located), each year. . This would ensure that these companies pay a fair share of taxes wherever they operate and generate profits.
Income gains for developing countries are expected to be higher than those for more advanced economies as a proportion of existing income, according to an OECD statement. However, it remains to be seen to what extent the new approach will benefit India.
India had taken the unilateral step of introducing a leveling tax, more as an interim arrangement, until a global consensus was reached. The offsetting tax was introduced as of June 1, 2016. According to it, an Indian payer must deduct 6% of payments (if they exceed Rs 1 lakh in one year) to a non-resident entity, for example , Google or Facebook for online ads. . The scope of EL was expanded by the Finance Act 2000 to cover non-resident e-commerce operators (whose turnover was more than 2 million rupees in one year). They would have to pay 2% taxes on the consideration received for online sales of goods or services.
In order to stop the adoption of such unilateral measures, the agreement establishes that no taxes will be applied to the recently enacted digital services to any company from October 8, 2021 until December 31, 2023 or the entry into force of the agreement, The thing that happens first.
To get to the heart of the first pillar issue, “multinational companies with global sales of more than € 20 billion and profitability of more than 10% will be covered by the new rules. According to him, 25% of profits above the 10% threshold will be reallocated to market jurisdictions, ”states an OECD statement.
The agreement has been the subject of criticism in some quarters. Alex Cobham, executive director of the Tax Justice Network, said the OECD has failed to come close to its original ambition. “The first pillar ‘beyond’ the arm’s length principle, as promised, for only a small portion of the profits of just 100 multinational companies. The symbolic measure maintains the centennial principle, widely recognized as inadequate for its purpose, unchanged for almost all multinational profits. ”
Pillar two introduces a global minimum corporate tax rate set at 15%. Ireland, with a low 12.5% ​​corporate tax rate, had become a tax haven for tech companies like Google, Facebook and Apple. The new minimum tax rate will apply to companies with revenues above € 750 million and is estimated to generate around $ 150 billion in additional global tax revenue annually. There will also be more benefits to the stabilization of the international tax system and greater tax certainty for taxpayers and tax administrations.
“Pillar Two establishes a global minimum rate, but so low at 15% that the incentives to change earnings will remain substantial; and with the vast majority of revenues captured by the United States and only a few others, ”Cobham says.
In the context of Pandora articles, a global minimum corporate tax rate bears interest. However, it should be noted that this applies only to multinational companies that meet the high threshold requirements.
Lead attorney Porus Kaka said: “This is the most radical global reform of the last century.” However, the dispute resolution mechanism is one of the key points to consider, he added.
“Today’s agreement will make our international tax agreements fairer and work better,” said the OECD Secretary General. Mathias Cormann. “This is a great victory for an effective and balanced multilateralism. It is a far-reaching agreement that ensures that our international tax system is fit for purpose in a digitized and globalized world economy. We must now work quickly and diligently to ensure the effective implementation of this important reform, ”Secretary General Cormann said.

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