Approach :
- Introduction
- Mention the proposals in Pillar I and Pillar II.
- Point out the implications on India’s Equalization levy.
- Mention briefly about Pillar II implementation.
- Conclusion
The OECD nations and other nations signatories to the G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) worked with an ambitious timeline to implement the Pillar I of the two-pillar solution developed to address the tax challenges that have emerged over the past few years from increasing digitalization of the economy. The broad consensus was announced in 2021, with necessary changes to domestic laws and treaties be drafted, enacted and implemented for the new rules to come into force in 2023.
- Pillar I : The new taxing right allows market jurisdictions to tax a portion of the profits of the largest multinational groups. The implementation of this entail multiple steps – multilateral convention, followed by explanatory statements & draft model rules for domestic legislation. This is to be finally succeeded by ratification by countries to take effect on ground in 2023.
- Pillar II : The development of standard remuneration for in-country baseline marketing & distribution activities are scheduled to be released this year end.
However, it appears that these challenging timelines for the development and signing of multilateral convention by mid-2022 may not be met. The OECD Secretary General recently commented that implementation of Pillar I could be deferred to 2024. From India’s perspective, this potential deferral can have impact in 3 broad areas :
- Implementation of Pillar I is linked to withdrawal of digital service tax like equalization levy. A potential delay can therefore prolong the applicability of equalization levy by one more year.
- There are many uncertain areas around the scope of equalization levy, like definition of ‘online sale of goods’ & ‘online provision of services’. Also, compliance mechanism for it has not evolved fully. There is no refund mechanism. An early withdrawal of equalization levy could have curtailed avoidable litigation.
- India & US have agreed on a transitional approach under which India is required to give a credit for equalization levy paid by US companies from April 1, 2022 to the date of implementation of Pillar I (March 31, 2024). Any delay in implementation would mean bearing the credit amount for the US companies.
Work on Pillar II has proceeded more rapidly, and model rules & technical commentary on GloBE Rules have been released, and countries can implement them by incorporating such model rules into their domestic tax laws. Although Pillar I & II are linked, they are part of a common solution, but can be implemented independently. It will be important to see if India goes ahead with the implementation of GloBE Rules in 2023.
Pillar I & Pillar II proposals did put a lot of pressures on multinational corporations which must not only undertake detailed assessment of the potential impact on their tax profiles & structures, but also make significant changes to their internal reporting and financial systems to ensure robust data complying with these changes. A delay can help companies plan and adapt to these new rules better.