Transaction tax

OECD tax deal unfair to India


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As for the distribution of profits for the purposes of taxing duties, the agreement only grants the “source” country the taxing rights to the extent of 25% of the profit.

In July 2021, the G7 meeting of advanced economy finance ministers agreed on a multinational corporate tax framework that is based on two pillars, a global minimum corporate tax rate of 15% and, second, ” arrive at a fair solution on the distribution of taxes. taxing rights, with merchant countries being granted taxing rights on at least 20 percent of profits exceeding a margin of 10 percent for the largest and most profitable multinational enterprises ”.

Meanwhile, 136 countries, including India, have participated in the efforts of the Organization for Economic Co-operation and Development (OECD) to achieve the Base Erosion and Transfer of Tax (BEPS) Framework Agreement. profits) for the taxation of the profits of multinationals. On October 8, 2021, these countries signed the above G-7 proposal with a slight change in the share of profits that the source country is to tax under the second pillar.

The OECD action plan requires multinationals to pay taxes of at least 15 percent wherever they operate and offer a 25 percent share of profits exceeding 10 percent to be reallocated to market countries. It also states that “no new digital services tax (DST) or other relevant similar measure will be imposed on a company from October 8, 2021 and until December 31, 2023 at the earliest, or the entry into force of the MLC (multilateral convention). “

The business suffers from certain infirmities. Let’s understand with the help of an illustration. Consider a multinational, say Amazon, whose country of origin is the United States; it has all of its clients located in India who purchase goods and services on the online platform of the former and it has a 100 percent investment subsidiary registered in a low tax jurisdiction, for example, the ‘Ireland.

If Amazon were to have a registered subsidiary in India and record the income from sales to Indian customers in that same subsidiary (this is indeed the right way to go), it would have paid tax on such income to the Indian government. However, he does not follow this path. Instead, it is asking its subsidiary in Ireland to increase the bill for Indian customers even as the Indian entity is designed more as a service company or commission agent for the parent company. This dubious arrangement ensures that almost all of the income from the Indian operations is on the books of the Irish branch. With Amazon’s business being digital – transcending physical boundaries – it’s easier for the business to obscure the real nature of the transaction.

As the income is recorded in the books of the Irish branch, the right to collect tax rests with the Irish government. Being a tax haven, Amazon pays very little or no tax in this jurisdiction. Also not having to pay tax in India (as no income is shown here), he gets away without paying tax anywhere.

No wonder source countries lose billions of dollars in tax revenue; the loss to India is about $ 10 billion a year.

The logical way to avoid this loss is for the country of origin, where the profits are made, to collect and tax them. This was recommended in a draft paper on ‘Taxing Digital Businesses’ published by the OECD on October 9, 2019. market. “

Developed countries led by the United States have given it a new twist by introducing the concept of minimum offshore corporate tax. They took things from a law enacted by the Trump administration (2017) to impose “Global Intangible Low-Taxed Income (GILTI). GILTI is applied on the offshore income of US-based multinationals with subsidiaries in countries with low 10.5 percent taxation.

In our illustration, being Amazon’s country of origin, the sole objective of the United States is to collect tax on all income earned by its Irish subsidiary. The US administration is least concerned that the company derives its income primarily from Indian customers and that the Indian government has the right to levy taxes on it.

If the administration were to do what it wanted, it would want Amazon to operate its global business from its base in the United States so that it can tax its income where it earns. Since in an interdependent world this is not possible, it looks for options whereby its local multinationals cannot establish subsidiaries outside of the United States. Therefore, he proposed the GMCT that President Joe Biden wanted to set at 21% but was ultimately lowered to 15%. It is clearly unfair.

This will interfere with a country’s sovereign right to determine “what its tax policy should be” and leave no room to adjust the tax rate to attract investment. For example, India will not be able to lower the corporate tax to less than the 15 percent currently applicable to new entities in the manufacturing sector. Other than that, it does nothing to tackle the central issue of profit shifting.

For example, levying a tax at 21 percent – from the current minimum of 15 percent (new manufacturing units) – will not result in an additional tax levy to fully offset the loss resulting from the profit shifting.

As to the distribution of profits for the purposes of taxing duties, the agreement only grants the “source” country taxing rights to the extent of 25 per cent of the profits. Who has the right to collect the 75 percent balance tax? The United States and other developed countries that are home to the majority of multinationals want this right to be with them.

It is odious.

How can a country (read India) from which the multinational derives all its income and profits be treated as residual, having the right to tax only 25 percent? On the other hand, how can a country (the United States) that has no contribution to income get away with taxing 75 percent of profits?

Certainly, from its real intention to throw itself on 100 percent of the profits recorded in the books of its investment branch or its subsidiary in a tax haven to collect taxes, the United States has fallen to 75 percent, but they continue to deny the Indian government its legitimate right to share in tax revenues. Previously, tax booty (although from India) was kept entirely by multinationals; now much of that will go to the United States and other developed countries.

In conclusion, India should harass the OECD to abandon the idea of ​​GCMT; each country should have the freedom to decide on the tax rate. As for the second pillar, ideally the source country from which an offshore company derives its income should have the exclusive right to levy taxes on it. Yet if “non-source” countries are to receive something, they should get it on a residual basis, say 20-25%.

Modi should also not agree to withdraw the “equalization levy” (a DST introduced in 2016/2020 instead of the income tax) which, according to the OECD action plan, must be done before that the new tax rules come into force. The levy should be abolished on the date of entry into force of the new regime.

(The author is a policy analyst. The opinions expressed are personal.)

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