As the G20 finance ministers endorsed the historic global tax deal on Wednesday in Washington, countries are gearing up to thrash out the implementation contours of the two-pillar package, which will give them the right to tax large digital companies including Microsoft, Google and Facebook and setting up of minimum global tax of 15 per cent.
The implementation will see negotiations around the finalisation of revenue sourcing rules and the elimination of double taxation for a rollout by 2023.
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The Organisation for Economic Cooperation and Development (OECD) tweeted on Wednesday night, "The G20 Finance Ministers and Central Bank Governors endorse the final political agreement to address the tax challenges arising from the digitalisation of the economy and establish a more stable and fairer international tax system."
Finance Minister Nirmala Sitharaman in her address said the agreement will help address tax challenges arising from the digitalisation of economy and in dealing with base erosion and profit shifting issues.
Pillar one deals with the reallocation of additional share of profit to the market jurisdictions, where the users are. The second pillar relates to a global minimum tax of 15 per cent. Pillar one will cover entities with a turnover of 20 billion euros, which are essentially top 100 global companies as against India's demand of covering the top 5,000 companies.
The share of profits to be reallocated to market jurisdictions will be 25 per cent of the 'residual profits' of companies as against at least 30 per cent sought by India. This is defined as profits above 10 per cent of return on sales.
Under the revenue sourcing rules in Pillar one, India will press for sharing of profits from these large entities based on where the services are getting consumed instead of where the seller or company is.
For instance, Google will need to pay taxes to India for the advertisements viewed in the country, as against where the seller of the advertisement is based out of, a government official told Business Today.
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"These contours need to be finalised. We feel India accounts for a large chunk of end-users or consumers of digital services offered by these internet giants. However, it will be difficult to assess the exact amount of gains for India at the moment," he added.
Besides, these entities will be seen as one unit for taxation purposes, as against multiple taxation entities. For instance, there will be only Google or Microsoft for tax compliance purposes instead of Google India or Microsoft India.
The Inclusive Framework comprising 140 countries working on the global tax deal will work out detailed source rules for specific categories of transactions. In applying the sourcing rules, the digital entity will need to use a reliable method based on specific facts and circumstances.
With revenue sourcing rules, the accounting will change for these top 100 global companies. These entities will need to segregate their revenues for accounting purposes based on where the users are based.
"Most of these companies have real-time tracking systems. They know who is engaging with the service. They will be able to make the segregation. So, compliance will not be very difficult for these very large companies," said another official.
Meanwhile, the elimination of double taxation will pertain to which country will give up revenues to ensure that the company is not taxed twice.
"If say India will earn additional Rs 5 crore from a company, another country will have to give up taxation rights on that amount. Those rules also need to be finalised, " said the official.
The double taxation of profit allocated to market jurisdictions will be relieved using either the exemption or credit method.
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On concerns that many companies may keep their profitability below 10 per cent to avoid the digital tax, the official pointed out that for most of them, the profitability is much higher than 10 per cent.
Moreover, these companies are listed, so they wouldn't be able to afford to keep profits low intentionally.
Meanwhile, countries will have to give up on unilateral measures, including India's Equalisation levy (EL) on e-commerce operators, once the digital deal comes into effect. India earned Rs 1,618 crore from EL in the first half of the current fiscal.
The OECD has estimated that developing countries are expected to gain an additional 1 per cent of corporate income tax (CIT) revenues, on average.
On Pillar Two, the minimum tax is expected to increase developing countries' revenues by approximately 1.5-2 per cent of CIT revenues on average.
In case of India, this will roughly translate into Rs 5,500 crore under Pillar one and about Rs 7,000 crore under Pillar two, based on the country's corporation tax budget target of Rs 5.45 lakh crore for 2021-22.
The OECD base erosion and profit shifting (BEPS) deal is intended to ensure that large multinational digital entities pay more taxes in countries where they have customers or users regardless of where they operate from.
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