BEPS 2.0 India perspective: a right step in the right direction

Under the existing law, different countries can impose different corporate tax rates on multinational companies. As a result, MNCs tend to locate lower tax jurisdictions (to minimize their tax burdens) and treat more (or all) of their profits as "sourced" to that country, bringing down their effective tax rate. This leads to increased tax revenues in countries with lower tax rates and decreased revenues in countries with higher rates. These tax strategies are called a "profit shifting" and result in "base erosion" in countries with higher corporate tax rates. India alone loses millions and billions of dollars in taxes annually owing to "global tax abuse" by MNCs. This led the international tax community to turn its attention to the problem of corporate tax avoidance.  The other problem which faced the Governments was the fact that large MNEs were able to earn revenue in foreign markets with  having a physical presence there.  Under the current international tax rules, these foreign markets could not seek a claim on the tax revenue arising from the local engagement of  foreign MNEs.  In response, several countries (including many G20 countries) have imposed "digital services taxes" on the revenue (rather than profit) of major technology firms to recapture some of the lost tax revenue. However, both countries and MNCs see this system as inefficient. BEPS 2.0 OECD aims to solve this problem.

The key part of the BEPS 2.0 is to address tax challenges resulting from the digitalization of the economy. While Pillar One aims to reallocate market jurisdictions of taxing rights that require a physical presence of a multinational in the market country, Pillar Two aims to set a global minimum tax rate of 15%. Overall, the two Pillars of BEPS are a commendable step forward in the global fight against tax gaps and large-scale tax evasion based on a historic global consensus from 136 countries. 

India is primarily a capital importing country. Commenting on the outcome of BEPS 2.0 from an Indian perspective, panelists agreed that it is a significant step towards having a more stable and fairer international tax system. Another panelist added that the outcome of BEPS 2.0 is expected to be good for most nations. One of the panelists described Pillar One of the BEPS 2.0 model as "the fundamental reallocation of taxing rights after the 1920s." The panelist added that India has participated "very actively in BEPS 1.0 and 2.0" as the country has realized that century-old tax reforms are no longer fit for the 21st-century economy.

For instance, the biggest concern of Indian MNCs doing business overseas is that their income should be taxed only once. For most large enterprises, the ETR is around 11%, but an average Indian MNC’s ETR is upwards of 25%. These Indian MNCs will not be worried about Pillar One, as the threshold is much higher. They will be worried about the reallocation. So, if there is a broader agreement on BEPS minimum standard of 15% where  most countries could come together, Indian MNCs might have a sigh of relief in terms of compliance hurdles as they would not have to talk to multiple tax authorities in different countries. The Indian MNC would benefit immensely from Pillar Two. However, companies doing business with India that are at risk of equalization levy will have to relook their structure regarding how they will comply with Pillar One.

Explaining how the narrative in the international taxing landscape has changed in the last decade, one of the panelists added that the fundamental purpose of the Double Tax Avoidance Agreement (DTAA) was to prevent payers from paying double taxes on the same income. Then comes BEPS 2.0, which will treat the entire MNC group as one entity and ensure a minimum level of taxation. The disadvantage of not having any such solution will be multiple unilateral measures and trade tensions that would inhibit investment in growth.

Mixed-bag global response to BEPS tax

Implementing the new global tax rules will give rise to a different attribution of tax revenue. According to an estimate by the OECD, Pillar One could see over US$100 billion reallocated to the market jurisdictions, while Pillar Two may help generate more than US$150 billion in new tax revenues globally.

As a result of increased tax certainty, the two-pillar package will lead to a better global environment for growth and investment, bringing benefits to tax administrators and payers. 

Giving an overview of what is happening around the globe and how countries and companies are responding to the new tax rules, one of the panelists said that though a political agreement has been received from 137 countries, the framework still needs to be delivered on a country-by-country basis. There is likely to be a significant amount of policy change due to BEPS Pillar Two. From the EU perspective, the directive from the European Commission is likely to come by the end of December 2021. In the US, the package is pending Senate approval. The UK has adopted Pillar Two to get Pillar One.

Sharing an update on the interplay of new tax rules with the equalization levy and how we will look at the transition as we advance, Vijay Iyer said, “Most forms of equalization levy and unilateral measures will go away once Pillar One is implemented. Of course, all the relevant inland measures will be discussed.”