MUMBAI: The forthcoming Budget is likely to indicate a road map for ushering in the ‘Pillar 2’ solution agreed upon by 137 member countries (including India), that are part of OECD’s inclusive framework and the G20. The Global Anti-Base Erosion (GloBE) rules comprise of two pillars to tackle the issue of taxation in a digital economy. Pillar 2, calls for a global minimum corporate tax of 15% on large multinational enterprises (MNEs), on the prescribed income arising in each of the countries in which they operate. “The GloBE rules are unlikely to trigger for business operations in India carried out by MNEs, as the effective tax rate in India is higher than the prescribed minimum rate. Nevertheless, one relaxation which would be significant from the GloBE rules perspective would be to ensure adequate carve-outs for regulated sectors viz: International Financial Services Centres in GIFT city and the related tax exemptions,” said Abhishek Goenka, founding partner at Aeka Advisors. As the Organisation for Economic Co-operation and Development (OECD) is expected to release an implementation framework only in the coming months, the Budget may not contain specific amendments to the I-T Act, but a broad-based reference.
Pillar 2, is founded on three principles: Income inclusion rule (IIR) and undertaxed payment rule (UTPR) — both of which are to be implemented by countries by amending their domestic tax laws — and the subject to tax rule (STTR), which falls within the tax treaty framework and is likely to be covered by multilateral instruments.
Maulik Mehta, corporate & international tax partner at BSR & Co, said, “The IIR imposes an additional tax on the ultimate parent entity, in its country of residence, with respect to the low taxed income of certain foreign subsidiaries. The UTPR acts as a backstop, it denies deductions or provides for adjustment for group entities to the extent of top-up tax not collected under IIR. Lastly, STTR permits the source country to withhold tax on certain payments, if such payments are subject to tax at less than 9% in the recipient’s jurisdiction.”
“India’s domestic tax law would require provisions enabling IIR (enabling the Indian parent entity to collect tax) and UTPR (enabling Indian constituent entities to collect tax, where an overseas parent entity country has not introduced IIR). Perhaps the government could issue a consultation paper to seek inputs from stakeholders,” said Jiger Saiya, tax leader at MSKA & Associates.
Mehta adds that consistency with OECD’s model rules will be required. This may need a separate chapter in the I-T Act, not just to provide a mechanism to compute and collect top-up tax through IIR and UTPR, but also to cover filing of information return, dispute resolution, etc.
Sanjay Sanghvi, tax partner at Khaitan & Co said, “It may be prudent to include a standalone provision under the I-T Act to cover implications under Pillar 2. It is expected that the government will formulate a document capturing the changes it intends to make to tax laws, invite suggestions and then proceed further. Various other countries such as France, Germany, Netherlands have followed such a consultative approach.”
In December 2022, Japan released a draft legislation for implementation of the IIR. December also witnessed the EU member countries reaching a consensus on implementation of Pillar 2 directives. In November, 2022, a consultation paper was released by the Australia Treasury. Singapore intends to introduce a top-up tax in the form of minimum effective rate and will present draft domestic rules in its 2023 Budget.
Source : TimesofIndia