Big digital players to pay a minimum global tax of 15%

A global deal was agreed by 136 countries, including India, out of 140 countries to ensure that the large companies pay a minimum tax rate of 15%, making it harder for them to avoid taxation, the Organisation for Economic Cooperation and Development (OECD) said on 8th October 2021. 

Why is a global minimum tax required?

The speed of integration of national economies and markets has increased substantially in recent years. It has become much easier for businesses at distant locations to deliver their products through digital channels in other geographical areas. Most businesses heavily rely on intangible assets and can shift their profits across borders to avoid or reduce tax. This has become a critical issue for the government because the existing taxation rules have become ineffective, and they have to cope with less revenue. It has also led to tax fairness issues with other businesses and individuals operating only in domestic markets.

What is the deal?

The OECD’s Base Erosion and Profit Shifting solution comprises two components, Pillar One and Pillar Two. 

Pillar One would reallocate a percentage of residual profit to market jurisdictions. The countries (other than home countries) from where the large firms perform their business activities and earn profits will receive the taxing rights regardless of their physical presence. Under Pillar One measure, taxing rights on about USD 10 billion of profit could be reallocated.

Pillar Two comprises several interlocking rules that would operate as a minimum tax rate. It seeks to put a floor for competition between the corporate income tax rates of the governments. If the companies pay lower tax rates in a particular country, their home governments (source jurisdiction) could apply top-up tax to a minimum of 15%.

The global tax deal will be effective from when?

The deal will be formally ratified in the G20 Finance Ministers meeting in Washington DC on 13th October 2021 and then by the G20 Leaders Summit in Rome at the end of this month.

The agreement asks for the countries to bring the law in 2022 to be effective by 2023. 

Countries, such as India in 2016, had introduced an equalisation levy of 6% on digital advertising services. Further, in April 2020, the scope was widened to impose a two per cent tax on non-resident e-commerce players. The government collected around 1500 crore equalisation levy in 2020-21. However, with the acceptance of the OECD plan, the government may have to repeal the equalisation levy.

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For any clarifications/feedback on the topic, please contact the writer at  namita.shah@cleartax.in