OECD Model on Global Minimum Tax

In News

• The Organization for Economic Co-operation and Development (OECD) released detailed rules for the implementation of a far-reaching global tax deal aimed at subjecting multinational enterprises (MNEs) to a 15% minimum tax from 2023.

About

• Global Anti-Base Erosion (GloBE): With the OECD keen that countries bring the so-called Global Anti-Base Erosion (GloBE) rules into domestic legislation in 2022, India’s Budget for 2022-23 will likely spell out India’s position and start laying the legislative framework to incorporate these rules.
• India is a signatory: India is one among 137 countries that are signatory to the new global tax regime.
• Exclusions: a governmental entity, an international organization, a non-profit organization, a pension fund, an investment fund that is an ultimate parent entity, and a real estate investment vehicle that is an ultimate parent entity etc.
• Application: The minimum tax would apply to MNEs with revenue above €750 million and is estimated to generate around $150 billion in additional global tax revenues annually.

The OECD is developing a two-pillar approach to address multinational enterprises (MNEs) exploiting gaps and mismatches between different countries’ tax systems.

• Pillar one: Seeks to achieve a fairer distribution of profits and taxing rights between countries.
• Pillar two: Will put a floor on corporate income tax competition by introducing a global minimum rate that countries can use to protect their tax bases.

Need of this move

• Right to tax: Under the OECD multilateral pact, India would get the right to tax them at the minimum rate of 15%.
• Addressing the tax challenge: OECD/G20 BEPS Project is addressing the tax challenges arising from the digitalisation of the economy.
• A coordinated system of taxation: The GloBE rules provide for a coordinated system of taxation intended to ensure large MNE groups pay this minimum level of tax on income arising in each of the jurisdictions in which they operate.
• Clear definition: It has clearly defined the MNEs within the scope of the minimum tax.

Issues/ Challenges

• No distribution of profits: Currently, an Indian MNE could set up a unit in a zero-tax jurisdiction and legitimately pay no taxes there and not distribute profits back to India.
• Compliance framework: The government needs to quickly spell out its positions to allow corporations to evaluate and critique their group structure and start building a compliance framework.
• Complex rules: These are complex rules and the principle of accounting consolidation.
• More compliance: The term ‘Permanent establishment has been defined as well under the model rules.
  • It has surely added more compliance for MNEs in terms of GloBE Information Return to be furnished with the tax administration in order to provide information on the tax calculations made by the MNE under the GloBE Rules no later than 15 months after the last day of the Reporting Fiscal Year.

Significance of the move

• End to the race towards the bottom: The minimum tax, known as Pillar Two, would discourage countries from competing to attract corporations by offering low tax rates.
• Imposing extra tax: The new rules also let countries such as India impose an extra tax on companies not meeting a 15% effective minimum rate in another jurisdiction.
• Digitalisation and globalization: The Pillar Two model rules provide governments with a precise template for taking forward the two-pillar solution to address the tax challenges arising from digitalisation and globalization of the economy.
• The mechanism for calculation: It has set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis, and for determining the amount of top-up tax payable under the rules.
• Other advantages: It prescribes the determination of excess profits, adjusted covered taxes, jurisdictional top-up tax percentage for every low-tax jurisdiction, substance-based income exclusion in computing the GloBE income.

Way Forward

• It will mostly benefit the rich OECD nations: Many in developing countries remain sceptical about the gains from the deal, particularly under Pillar One. They argue that the deal will mostly benefit the rich OECD nations that are home to most of the large MNCs.
• Race to the minimum: Kenya, Nigeria, Sri Lanka and Pakistan have not joined in the deal. There are fears that the 15% rate will start a race to the minimum, with a large number of nations dropping the corporate tax rate to 15%, leading to an erosion of tax revenues.
  • The global average corporate tax rate is currently 24%. The tax rate in the African nations is between 25% and 35%.
• The rise in personal income tax rates is feared: One outcome of the deal is a possible contraction of the corporate tax revenues of governments from the lowering of rate to 15%. That will force governments to raise resources from other sources. Thus, a rise in personal income tax rates is feared.

Source: FE