OECD/G20 INCLUSIVE FRAMEWORK TAX DEAL

OECD/G20 INCLUSIVE FRAMEWORK TAX DEAL

CONTEXT

  • India and the majority of the members of OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have joined a new two-pillar plan to reform international taxation rules.
  • The proposed solution consists of two components- Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules.

MORE ABOUT NEWS

  • The significant majority of countries constituting the 131-member Inclusive Framework(“IF”) on Base Erosion and Profit Shifting (“BEPS”) have agreed on the broad construct for a deal for Pillar One and Pillar Two proposals (“Agreement”).
  • The Programme of Work is divided into two pillars
    • Pillar One addresses the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules;
    • Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

BEPS IN A NUTSHELL

  • Domestic tax Base Erosion and Profit Shifting (BEPS) due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems affects all countries. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately.
  • In general BEPS strategies are not illegal; rather they take advantage of different tax rules operating in different jurisdictions.
  • Business operates internationally, so governments must act together to tackle BEPS and restore trust in domestic and international tax systems.
  • BEPS practices cost countries 100-240 billion USD in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue.
  • Working together in the OECD/G20 BEPS Project, over 60 countries jointly delivered actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.

WHAT IS THE INCLUSIVE FRAMEWORK (IF) ON BEPS?

  • Following the release of the BEPS package in October 2015, G20 Leaders urged its timely implementation and called on the OECD to develop a more inclusive framework with the involvement of interested non-G20 countries and jurisdictions, including developing economies.
  • To become a member, a country or jurisdiction needs to commit to the BEPS package and pay an annual membership fee.

SIGNIFICANCE OF INCLUSIVE FRAMEWORK(“IF”)

  • Implementing measures protects your tax base, such as the development of provisions to avoid treaty abuse and to introduce Country-by-Country Reporting, for which the BEPS Package provides minimum standards.
  • Having an equal voice in the development of standard setting and BEPS implementation monitoring.
  • Access to capacity building support including guidance on developing Action Plans for BEPS implementation.
  • Being part of a wider community of exchanges of practice and sharing experiences with other countries.

INDIA’S STAND

  • India will have to roll back the equalisation levy that it imposes on companies such as Google, Amazon and Facebook when the global tax regime is implemented.
  • India favours a wider application of the law to ensure that the country won’t collect less under the proposed framework than it gets through the equalisation levy.
  • India is in favour of a consensus solution which is simple to implement and simple to comply with.
  • The solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.
  • The Two Pillar Plan justifies India’s stand for a greater share of profits for the markets and consideration of demand side factors in profit allocation.

EQUALISATION LEVY

  • Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India. It is aimed at taxing business to business transactions.
  • Applicability of Equalisation Levy – Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient.
  • The two conditions to be met to be liable to equalisation levy:
    • The payment should be made to a non-resident service provider;
    • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.
  • The applicable rate of tax is 6%
  • Currently, not all services are covered under the ambit of equalization Levy. The following services covered:
    • Online advertisement
    • Any provision for digital advertising space or facilities/ service for the purpose of online advertisement

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