Representatives from 136 nations, including India has finalised a global tax deal which will ensure large digital players–Google, Facebook, Netflix, and Microsoft– pay a minimum tax rate of 15 per cent, wherever they operate, said the Organisation for Economic Cooperation and Development (OECD) on Friday. The tax deal to come into effect from 2023.
The OECD has also sought for an immediate withdrawal of unilateral digital services tax measures like equalization levy and a commitment to not introduce such measures in future.
Besides, no newly enacted digital taxes or other relevant similar measures will be imposed on any company from October 8 2021 and until the earlier of December 31, 2023.
India introduced equalization levy for digital advertising services in 2016 at the rate of 6 per cent. Later in April 2020, it widened the scope to impose a 2 per cent tax on non-resident e-commerce players. India so far collected over 1,600 crore levy this fiscal which is almost doubled from last year.
Of 140 countries, 136 have agreed to two-pillar solution to address the tax implications arising from digitisation of economy in Paris on Friday. However four nations- Sri Lanka, Kenya, Nigeria and Pakistan had not joined the agreement.
This deal now will be delivered to the G20 Finance Ministers meeting in Washington DC on 13 October, then to the G20 Leaders Summit in Rome at the end of the month.
The global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually, OECD highlighted.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” he added.
Sandeep jhunjhunwala, Partner, Nangia Andersen
The “seismic global tax agreement” as being referred to by narrators has stepped up the game to lay the edifice of a landmark deal with the release of the implementation plan having 136 countries agreeing to Inclusive Framework. The Statement released by the OECD weighed against the one in July 2021 brings out some interesting observations, on which taxmen and taxpayers had their eyes laid on.
The proposed solution under the OECD’s Base Erosion and Profit Shifting consists of two components.
Pillar 1 of the proposal talks about taxing companies with 20 billion euro revenues and a profit margin above 10 per cent. These largely cover the top 100 companies. The threshold will be reviewed after seven years to cut it to 10 billion euros. This is much higher than the 1 billion euro revenue threshold pressed by developing countries, including India, to cover 5,000 global companies.
Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
Pillar 2 aims to ensure that multinational businesses are subject to a minimum effective level of tax on all of their profits each year. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations. However it was initially proposed to be brought to effect from 2023 but now been deferred to 2024.
OECD said that the two-pillar solution contains a number of features to ensure that the concerns of low-capacity countries are addressed. The OECD will ensure the rules can be effectively and efficiently administered, also offering comprehensive capacity building support to countries which need it, it noted.