India and majority members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on July 1 adopted a high-level statement outlining a consensus solution to address tax challenges arising from the digitalisation of the economy.
As per a statement from the Centre, the proposed solution comprises two components – Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two which consists of minimum tax and subject to tax rules.
Some significant issues including share of profit allocation and scope of subject to tax rules, remain open and need to be addressed.
Technical details of the proposal will be worked out in the ensuing months and a consensus agreement is expected by October.
“The principles underlying the solution vindicates India’s stand for a greater share of profits for the markets, consideration of demand side factors in profit allocation, need to seriously address the issue of cross border profit shifting and need for subject to tax rule to stop treaty shopping,” the statement added.
It further noted that India is in favour of a consensus solution which is “simple to implement and simple to comply.”
“At the same time, the solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies. India will continue to be constructively engaged for reaching a consensus based ready to implement solution with Pillar one and Pillar two as a package by October and contribute positively for the advancement of the international tax agenda,” it said.
Consensus reached by OECD Inclusive Framework among 130+ members on two pillar solutions is irrefutably a colossal outcome, and will accelerate the ongoing efforts to reset about a century-old international tax rules enshrined in bilateral tax treaties, analysts said.
“Latest agreement on Pillar 1 solution provides an objective in-scope definition for largest (sales >20bn Euro) and most profitable (>10% global profitability) MNEs to be subject to new nexus and profit allocation rules,” said Sumit Singhania, Partner, Deloitte India. A 20 to 30% allocation of super normal profits to market jurisdictions is definitely a decent bargain for large number of source jurisdictions, Singhania said.
The finality dawning on multilateral negotiations also will pave way for phase out of unilateral measures like digital service tax and any like measure such as Equalisation levy in Indian context.