The Central government is preparing to adopt the OECD Pillar-2 tax regime in the upcoming Budget. This move aims to support and benefit from the global effort to combat tax avoidance. The Finance Bill, 2024, will be amended after the full Budget is tabled in July, with provisions coming into effect from September.
Understanding Pillar-2 GloBE Rules
The Pillar-2 GloBE Rules establish a global minimum tax for multinational enterprises (MNEs). These rules ensure that MNEs maintain a minimum Effective Tax Rate (ETR) of 15% across all jurisdictions they operate in. MNEs are defined as entities with a global turnover exceeding 750 million euros. To implement Pillar-2 in India, tax laws will be amended to include several rules:
- Qualified Domestic Minimum Top-up Tax (QDMTT)
- Income Inclusion Rule (IIR)
- Undertaxed Profits Rule (UTPR)
- Subject to Tax Rule (STTR)
These rules enable India to impose a ‘top-up tax’ on companies that report profits in low-tax jurisdictions. For example, if an MNE group headquartered in India pays a 9% corporate tax in the UAE, the remaining 6% will be payable as a top-up tax under the Pillar-2 regime.
Impact on Indian Multinational Enterprises
For Indian-based groups with subsidiaries abroad, there will be additional tax outflows and an increased compliance burden. This will likely increase Indian government tax revenue. However, estimates of possible revenue gains have not been made yet. The Central Board of Direct Taxes (CBDT) will need to issue guidelines, circulars, and FAQs to explain these rules. This includes defining low-tax income, calculating effective tax rates, and ensuring compliance.
Enhancing Compliance and Preventing Tax Avoidance
Implementing Pillar-2 rules in India requires legislative changes, administrative guidelines, and international coordination. The regime aims to prevent MNEs from shifting profits to low-tax jurisdictions. By ensuring these companies pay a minimum global tax rate, India can protect its tax base from erosion. This should lead to increased revenue as more profits are taxed within the country. However, the actual revenue impact will depend on how effectively the rules are implemented and how MNEs respond.
Challenges and Considerations
Indian-headquartered MNEs with subsidiaries in low-tax jurisdictions should start evaluating the impact of the tax package while preparing consolidated group financials. Over 27 countries have already incorporated Pillar-2 rules into their domestic laws. Indian-headquartered MNE groups operating in these jurisdictions will have to provide for top-up tax in their financial statements for the year ending March 31, 2024.
Implementing OECD Pillar-2 is not without challenges. It will significantly impact India’s taxation of the digital economy and may require adjustments to existing unilateral measures. Changes to domestic tax legislation and tax treaties are also necessary for the Subject to Tax Rule (STTR). This may involve bilateral negotiations or amendments to the multilateral instrument (MLI).
Revenue Implications and Strategic Planning
The Central government may incorporate the OECD Pillar-2 GloBE rules in the country’s domestic law in the full Budget. However, it may not fetch India the anticipated revenue as previously envisaged. The Qualified Domestic Minimum Top-up Tax (QDMTT) limits the country’s ability to benefit from the adoption of the tax package.
For instance, in the example of India and the UAE, the top-up tax may either be paid to India or the UAE. This depends on whether the low-tax jurisdiction (UAE) has introduced QDMTT. If QDMTT is not invoked, India will have the right to collect the extra 6%. However, India is unlikely to get any extra revenue as jurisdictions are likely to incorporate the global minimum tax rate into their domestic laws and collect taxes from entities within their jurisdiction under the QDMTT mechanism.
Global and Domestic Coordination
The low-tax jurisdiction has the primary responsibility to collect this “top-up tax” by implementing QDMTT within its domestic tax law. If QDMTT is not implemented, the right to collect the top-up tax will flow to India through an income-inclusion rule (IIR) if India adopts the GloBE rules. If India fails to implement an IIR, the right to collect the top-up tax will extend to other jurisdictions that have adopted GloBE rules through an Undertaxed Payments Rule (UTPR). The QDMTT comes first in order of how top-up taxes are collected.
Also read: Boosting Electronic Component Manufacturing in India: A New Proposal
Conclusion
India’s adoption of the OECD Pillar-2 tax regime represents a significant step in combating tax avoidance and protecting the country’s tax base. While there are challenges and complexities involved, the strategic implementation of these rules can enhance compliance and increase revenue. As the government prepares to incorporate these changes into the upcoming Budget, coordination and clear guidelines will be crucial for effective implementation and achieving the desired outcomes.
