View: BEPS 2.0 reform, a catalyst for changing the GLoBE tax landscape

While digital economy was gradually creeping into global trade, the pandemic accelerated the pace such that it has seemingly become a necessity. Digitalisation has transformed the way of doing business in India and companies are investing humongous resources towards digitalising.

Digitalisation has led to addressing growing tax concerns to protect tax base within respective jurisdiction basis fair allocation of taxable income or to tax income on a fair and equitable basis.

To keep pace with such rapidly transforming digital economies and address the tax challenges, India, along with other OECD and G-20 members or more than 136 countries, agreed to adopt the BEPS 2.0 initiative. A two-pillar solution aims at reallocation of profits of MNCs to market jurisdictions - Pillar One as well as their taxation at 15 percent (minimum tax rate) - Pillar Two.

On 20 December 2021, the OECD released detailed Model Rules . The GloBE rules provide for a coordinated system of taxation designed to ensure large MNE groups pay minimum level of tax on income arising in each of the jurisdictions in which they operate. The rules create a ‘top-up tax’ to be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate.

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Pillar Two includes two interlocking rules that together comprise the GloBE rules, the Income Inclusion Rule (‘IIR’) and the Undertaxed Payments Rule (‘UTPR’). It also includes the Subject to Tax Rule (‘STTR’), which is a treaty-based rule that allows source jurisdictions to impose withholding tax on certain related party payments that are subject to tax below a minimum rate. The language and calculations prescribed are very complex.

The statement suggests that the Pillar Two should be brought into domestic law in 2022, to be effective in 2023, with the UTPR being targeted to come into effect in 2024. Whereas Pillar 1 is more likely to be addressed by way or Multilateral Instrument (MLI); similar to MLI signed by 90+ jurisdictions under BEPS 1.0.

The OECD Commentary relating to the model is expected to be released in early part of 2022. The Model Rules and the coming Commentary are intended to be employed by Governments in incorporating the global minimum tax into their domestic tax legislation.

Given that the mutually agreed timeline for implementation of Pillar 2 is January 2023, several countries forming part of EU including UK have taken their first step towards Pillar 2 by announcing draft legislative changes. On similar lines, we expect similar tax legislative amendments in Budget 2022 to align the taxation rights for India under Pillar 2.

India has been on the forefront of the BEPS project and was an active participant in the development of the aforesaid rules. The aforesaid rules align with India’s policy objectives of eliminating harmful tax competition and attract foreign capital/ investment based on substantial economic activity. Further, it also relieves the pressure on the Government to offer any tax incentives/ tax holidays for attracting foreign investment which again is in line with India’s current tax policy of phasing out most tax incentives.

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Further, a 15% minimum tax will not adversely affect Indian interests given that today the profits are subjected to a tax rate that is higher than 15%. The rules are likely to result in significant revenues for countries, including India.

Prominent amendment which is expected by the global taxpayers on BEPS 2.0 implementation is withdrawal of the equalisation levy which was introduced as a temporary measure in 2016 to tax digital transactions. This is because the Two-Pillar solution require all countries to remove unilateral tax adopted and bars countries on introducing such measures in the future. The conclusion of multilateral negotiations will clear the way for unilateral measures to be phased out.

The OECD in its earlier action plan had proposed measures for countries to tax big tech companies, and equalization levy was one of them, which India adopted and implemented. The Inclusive Equalisation levy was aimed at taxing companies which did not have a physical presence but had virtual or digital presence and were not subject to tax in the places they earn their income, according to the existing rules. With the new rules, the reason for these levies vanishes, and their elimination is a fundamental component of the accord.

Some of the countries (UK, France etc) which had legislated Digital Taxation laws, have temporarily paused the effective implementation.

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The removal of these taxes and implementation of the new rules will need to be pre-organized and harmonized between countries. Interestingly, in October 2021, India and USA have reached to an agreement on a transitional approach to existing Unilateral Measures while implementing Pillar One. In summary, under the Unilateral Measures compromise, India has agreed to allow for a credit mechanism where some amount of the respective equalisation levy may offset the Pillar One tax liability. The final terms of the Agreement are to be finalized by February 2022. To this effect, once could expect corresponding amendments to EL in Budget 2022

In addition to the above, OECD in its action plan had also suggested a nexus rule based on Significant Economic Presence (‘SEP’) to tackle digital economy which later, India introduced in its domestic tax legislation as it was to certainly widen the tax net. A non-resident is considered to have SEP in India if it carries out transactions in any goods or services or property with any Indian resident, if the aggregate payments exceed Rs 20 million in a year; or it is in systematic and continuous soliciting of business or in interaction with a minimum of 300,000 users in India. Now with new rules coming in, there is little uncertainty on its continuation.

Impact on businesses - companies should start evaluating the potential and practical impact of these changes on their business models to assess how they impact their overall tax burden and the necessity for any group restructurings. It is also imperative to build a robust tax framework with sufficient tax technology in place for complying with such model rules and to save reputational risk & higher compliance costs.

As mentioned above, businesses should also watch for changes in domestic tax legislation related to the implementation of the global minimum tax rules. Interaction with OECD and policymakers will be important to understand the commercial and business implications nationally and globally.