Global Minimum Tax: Anticipation for its roadmap in Indian Budget

There is high anticipation among the Multi-National Enterprises (MNE’s) and tax professionals of a roadmap for India’s approach to adopting the Global Minimum Tax, also known as the ‘Pillar Two’ global tax in the upcoming Budget.

Global Minimum Tax (GMT)

• About: The Global Minimum Tax (GMT) is an agreement reached by 136 countries, including India, to ensure that large multinational corporations pay a minimum tax rate of 15%. 
  • It is one of the most significant reforms of international tax regulations in a century.
• Based on: It is an agreement based on the Global Anti-Base Erosion (GloBE) Model Rules.
• OECD’s Inclusive Framework: It is prepared under the Organisation for Economic Co-operation and Development’s (OECD’s) Inclusive Framework.
  • Involves over 140 countries.
• Two Pillar Plan:
  • Pillar 1: primarily deals with the reallocation of income to market jurisdictions.
    • Pillar 1 repeals digital services taxes and similar measures, with unclear identification and timetable.
  • Pillar 2 focuses on establishing a global minimum taxation framework and preventing tax avoidance.
    • Pillar 2 aims to ensure income is taxed at an appropriate rate and establish a GMT of 15% for multinationals with €750 million turnover.  
• Need for GMT: The need for GMT arises from financial diversion to tax havens and the desire to mobilise financial resources.
• Objective: GMT aims to address the low effective tax rates paid by major corporations, including tech giants like Apple, Alphabet, and Facebook. 
  • These companies often use complex subsidiary structures to shift profits to low-tax countries or tax havens such as the Bahamas, Panama, British Virgin Islands etc.
  • GMT ensures that large multinational enterprises pay a minimum level of tax on their income in each jurisdiction where they operate
• Key Benefits:
  • Reduces the incentive for profit shifting.
  • Places a floor under tax competition.
  • Ends the race to the bottom on corporate tax rates.
  • Economists expect the deal to encourage multinationals to repatriate capital to their home countries, benefiting those economies.
  • It also aims to end decades of tax competition.

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Mechanism of Global Minimum Tax

• Applies to:  The Minimum Tax Rate applies to multinational enterprises (MNEs) with global revenues above €750 million annually.
  • MNEs must pay a minimum effective tax rate (ETR) of 15% on a country-by-country basis.
• Provision of a Top-Up Tax:
  • If an MNE’s effective tax rate (ETR) falls below 15% in any country, a top-up tax is imposed.
  • This tax is payable to the nation where the MNE’s parent company is based.

Example Case to understand the Global Minimum Tax

• An Indian multinational has subsidiaries in the UAE and Germany. With Tax Rates of: UAE: 9% and Germany: 30%
• Top-Up Tax
  • India: India would impose a 6% top-up tax for the UAE’s shortfall if the UAE doesn’t meet the minimum tax rate.
  • UAE’s Right to Collect:  UAE has the first right to collect the tax if it enacts a compatible domestic minimum tax.
• Backstop Rule: 
  • Under-Taxed Profit Rule (UTPR): If neither India nor the UAE enacts Pillar Two, Germany can collect the UAE shortfall through UTPR.
  • UTPR is set to take effect in several countries from 2025.
• Incentive for Implementation:
  • Pillar Two is designed so that if one country legislates it, that country can collect the entire top-up tax.
  • Therefore, No country, including India, would want to be left behind in the implementation process.

Implementation Progress

• Current Status: Over 50 countries are at various stages of implementing Pillar Two.
• Countries Already Implementing:
  • European nations: UK, Switzerland, Belgium, Netherlands, France, Germany, Ireland.
  • Other countries: Australia, Korea, Japan, Canada.
• Upcoming Adoptions:
  • Singapore and Hong Kong plan to roll out Pillar Two in 2025.
  • The UAE is conducting consultations for its implementation.

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Impact on Multinational Enterprises (MNEs)

• Assessment Required: Businesses need to evaluate how Pillar Two affects their current and future transactions.
  • MNEs must evaluate their systems for the new tax regime’s analytical, compliance, and reporting requirements.
• Data and Compliance Challenges: Compliance requires extensive accounting and tax data, which may not be easily accessible.
  • MNEs need to manage varying local regulations due to the phased implementation across jurisdictions.
• Pillar Two impacts the corporate race to stay competitive: The new global tax regime will impact existing tax incentives and tax-holiday schemes across the globe, as a low ETR on account of such incentives will result in a top-up tax liability. 
  • Therefore, several countries are redesigning their tax incentive programmes for their businesses to remain competitive in the post-Pillar Two world.
  • MNEs, therefore, would now need to take into account changes in tax-incentive structures as they re-assess their ongoing and proposed investments.

Status of Indian Multinational Enterprises (MNEs)

• Preliminary Assessments: Most Indian MNEs have started or completed initial impact assessments.
• Preparation for Compliance: They are now focusing on ongoing compliance and tax provisioning for potential ETR shortfalls in low-tax countries.

Associated Challenges with the implementation of Global Minimum Tax:

• Varied Jurisdictional Approaches: Different countries may interpret and implement Pillar Two differently, leading to inconsistencies and potential disputes in global tax enforcement.
• Impact on Tax Incentives: Countries may need to overhaul or eliminate existing tax incentives and holiday schemes, potentially affecting local businesses and economic development.
• Complexity of Implementation: The intricate rules and requirements of Pillar Two could create significant administrative and compliance burdens for both governments and multinational enterprises.
  • This can discourage foreign investment in some jurisdictions, impacting economic growth.
• Affects Sovereignty: The global minimum tax could limit a nation’s ability to set its own tax policies, removing a key tool for pursuing national interests.
• Effectiveness Concerns: Critics, including groups like Oxfam, argue that the deal may not effectively eliminate tax havens or address all tax avoidance issues.

Suggestions for India’s Introduction of Pillar Two 

• Stakeholder Consultations:
  • India should consult with various stakeholders before introducing Pillar Two.
  • Focus on how Pillar Two interacts with India’s existing tax system and its implications for tax incentives in GIFT City, Gujarat.
• Mindset of the MNE’s: Pillar Two represents a collective move towards global tax fairness.It is the first truly global tax system in a world of increasing business globalisation. MNEs will need to adapt to new technologies and mindsets as they implement Pillar Two.

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Conclusion

India’s adoption of Pillar Two is imminent; it’s a question of when, not if. The countdown has begun, and the focus is now on how the government will implement these global tax reforms effectively.

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