G-20 News

India joins the G20-OECD Fiscal Framework Agreement



India has joined the inclusive G20-OECD framework agreement that aims to reform international tax rules and ensure multinational companies pay their fair share wherever they operate, the finance ministry said on Friday.

However, India will have to reverse the equalization levy it imposes on companies such as Google, Amazon and Facebook when the global tax regime is implemented.

The OECD said the signatories amounted to “130 countries and jurisdictions, representing over 90% of global GDP.” The details of the regime and the implementation schedule will be established in October, he added.

ET reported last month that India was in favor of wider application of the law to ensure that the country does not collect less under the proposed framework than it gets through the equalization tax.

“The principles underlying the solution justify India’s stance in favor of a greater share of the profits for the markets,” the finance ministry said. “Some important issues, including the distribution of profits and the scope of tax rules, remain open and need to be addressed,” he said.

Two pillars of the framework

The ministry called for “the allocation of significant and sustainable revenues to market jurisdictions, especially for developing and emerging economies.”

The framework rests on two pillars, one dealing with transnational and digital companies and the other with low-tax jurisdictions to combat cross-border profit shifting and conventional shopping.

The first pillar ensures that large multinational companies, including digital companies, pay taxes where they operate and make a profit. Most of these companies have so far paid low taxes by shifting their profits to low-tax jurisdictions. “Under the first pillar, the rights to tax over $ 100 billion in profits would have to be reallocated to market jurisdictions every year,” the OECD said.

The second pillar aims to impose a floor on competition between countries through a minimum overall corporate tax rate, currently proposed at 15%. This is expected to generate $ 150 billion in additional tax revenue.

If implemented, countries such as the Netherlands and Luxembourg which offer lower tax rates and tax havens such as the Bahamas or the British Virgin Islands could lose their luster.

Equalization tax

In 2016, India imposed a 6% equalization tax on online advertising services provided by non-residents. This applied to Google and other foreign online advertising service providers.

The government widened its scope from April 1, 2020, imposing a 2% equalization tax on digital transactions by foreign entities operating in India or having access to the local market.

Tax revenue for the last fiscal year stood at Rs 1,492 crore through January 30, about 30% more than the Rs 1,136.5 crore collected in fiscal year 20 This levy will have to be abolished as part of the new regime which should be put in place in 2023.

Experts said India will need to weigh expected revenues under the new rules against what it gets from the equalization tax, in addition to examining their applicability.

“One would look forward to the end result as well as the overall minimum tax rate that is ultimately agreed upon from the proposed 15%,” said Sanjay Sanghvi, partner at the law firm.

& Cie.

In the first phase, the levy is proposed to cover only the first 100 multinationals with more than 20 billion euros in turnover and a profitability of more than 10%. It will apply in market jurisdictions where the entity achieves at least € 1 million in revenue.

“Will India be able to continue to levy EL (equalization levy) on businesses that are not covered by this – remains to be seen,” said international tax specialist Daksha Baxi, founder of SRI Solutions.