Taxing multinationals

Govt must protect revenues under the new tax deal

After several years of negotiations, 136 countries, representing over 90 per cent of global output, finalised the agreement last week to tax multinational corporations. Since almost all members of the Organisation for Economic Cooperation and Development’s (OECD’S) framework on base erosion and profit shifting have agreed, tax avoidance for multinational corporations would become difficult once it’s implemented. The two-pillar tax solution will now be presented before the finance ministers of the G20 countries this week and later at the G20 leaders’ summit. A global agreement on taxing multinational corporations had become necessary because of a variety of reasons. With the increasing dominance of digital technology and intellectual property, it became easier for large corporations to avoid taxes in their home countries or where the income was being generated by shifting profits to low-tax jurisdictions.

It was creating trade-related tensions because of a difference in opinion on such income and its taxation. The agreement was also being driven by the need to raise more revenue to finance the increasing demands on national budgets in several countries, particularly after Covid-19. The US has said it will end the race to the bottom in terms of corporate taxation. The deal is expected to provide stability to the international tax system and reduce overall friction. Under pillar one of the agreement, taxing rights worth over $125 billion would be allocated to different market jurisdictions. According to the OECD, developing countries are expected to gain more than the developed ones in this context. Multinational corporations with global sales of over ^20 billion and profitability over 10 per cent would be covered under the new rule. The ^20 billion threshold will be reviewed later and brought down to ^10 billion.

This is where India as a party to the agreement would need to be careful and make sure that its interests are protected. The multilateral convention in this regard is being worked out and would become the vehicle for implementing tax rights under pillar one. India started imposing a 6 per cent equalisation levy in 2016 for digital advertising services. Further in 2020, it imposed a 2 per cent tax on non-resident firms in the e-commerce business. The government has collected about ~1,600 crore on this account in the current fiscal year so far. India will need to withdraw such taxes once the agreement is implemented. Given the potential for digital services in the country, it is important to make sure that the government doesn’t lose out on revenue, and that multinational firms pay their fair share in India.

Doing so is critical, because once the new tax rules are accepted and implemented, it will be extremely difficult to get them changed. Thus, India should use the upcoming G20 meetings to press its position. Pillar two of the agreement will introduce the global minimum corporate tax rate of 15 per cent. This would include companies with revenues over ^750 million and is expected to generate additional tax revenue of $150 billion. The OECD notes that this is not to eliminate global tax competition but to put a limit. It will work on model rules in 2022 to be implemented by 2023. Effective implementation would clearly depend on how the interests of all parties are addressed. Disagreements could actually end up increasing friction in trade relations.