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Legal discussion on OECD Pillar Model Rules

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The Organisation for Economic Cooperation and Development (OECD) is a club of 37 nations that meets to discuss and implement economic and social policies. Members of the OECD are usually democratic countries that favour free markets. It is known as a think tank or a monitoring organization. Its declared mission is to influence policies that promote prosperity, equality, opportunity, and well-being for all people. It has dealt with a variety of concerns over the years, including enhancing the standard of living in member nations, contributing to global trade development, and fostering economic stability.

The Organization for Economic Cooperation and Development (OECD) was founded on December 14, 1960, by 18 European countries, as well as the United States and Canada. Over time, it has grown to include members from South America and Asia-Pacific. It encompasses the majority of the world’s most developed economies.

The Organization for Economic Cooperation and Development (OECD) releases economic studies, statistical databases, assessments, and projections on the global economic outlook. The focus of reports might be global, regional, or national. The group studies and reports on the influence of social policy concerns on economic growth, such as gender discrimination, and develops policy suggestions to promote growth while being environmentally conscious. Bribery and other forms of financial crime are also targets for the group. The OECD maintains a so-called “black list” of countries that are deemed uncooperative tax havens, albeit no countries are now on it because, by 2009, all countries on the original list had agreed to apply the OECD transparency requirements. The Organization for Economic Cooperation and Development (OECD) is leading a global initiative with the Group of 20 (G20) to promote tax reform and reduce corporate tax dodging. The project’s suggestions included a prediction that tax dodging loses the world’s economies between $100 billion and $240 billion in income each year. In addition, the firm offers consultation and support to countries in Central Asia and Eastern Europe that are implementing market-based economic reforms.

The Pillar Two Model Rules (also known as the “Anti Global Base Erosion” or “GloBE” Rules), which will be released on December 20, 2021, are part of the Two-Pillar Solution to address the tax challenges of digitalization that was agreed upon by 137 member jurisdictions of the OECD/G20 Inclusive Framework on BEPS and endorsed by the G20 Finance Ministers and Leaders in October. Delegates from all Inclusive Framework member countries worked on them, and they were unanimously agreed upon and adopted.

The Pillar Two Model Rules are intended to guarantee those big multinational businesses (MNEs) pay a minimum amount of tax in each country in which they operate. The regulations are around 45 pages long, with an additional 15 pages of definitions. They are written as model regulations that countries can use to convert into domestic legislation, allowing them to implement Pillar Two within the agreed-upon timeline and in a coordinated way.

The Model Rules are a significant step forward in the implementation of a new tax regime that aims to radically restructure the international tax architecture by allowing countries to tax back profits of multinational enterprises (MNEs) headquartered in jurisdictions that offer no- or low-tax regimes. The OECD estimates that the new regime will raise an extra $150 billion in worldwide tax collections through the application of higher taxes and associated behavioral changes among MNEs as a result of reduced incentives to engage in profit-shifting activities by taking advantage of low tax rates.

Despite the high yearly revenue requirement of 750 million euros, the OECD anticipates that the framework will cover 90 percent of the worldwide corporate income tax base. The Model GloBE Rules are a significant step forward for India. The guidelines will relieve the Indian government of the pressure to grant tax breaks in order to attract international investment. At the same time, a minimum tax of 15% may not be detrimental to Indian interests because Indian earnings are normally taxed at a rate higher than 15%. It also assures that India’s lower corporation tax rate of 17% for new manufacturing enterprises maintains their competitiveness.

The high yearly revenue barrier of 750 million euros suggests that Indian MNE organizations have a restricted scope. While signatory nations have the option of applying the GloBE Rules to MNEs with revenues below the level, India should carefully evaluate the impact on small Indian MNEs’ competitiveness as well as the administrative work that would be necessary before exercising this option.

The Pillar Two model regulations also cover the treatment of group member acquisitions and dispositions, as well as unique requirements for dealing with certain holding structures and tax neutrality regimes. Finally, the rules address administrative issues such as information filing requirements and transitional procedures for multinational enterprises that become subject to the global minimum tax.

The Model Rules give enough information for MNEs to conduct an impact analysis and prepare for the implementation of a minimum tax structure. Given the Model Rules’ complexity, substantial expenditure and effort will be required to ensure compliance.

It’s also worth noting that the GloBE tax due is calculated using an “effective tax rate,” which is a complicated formula that differs from local tax laws. In this context, a headline corporate tax rate of 15% or higher is insufficient, and multinationals conducting business in India will be expected to calculate their GloBE tax base and ETR calculations using Model Rules in order to determine the exact impact.

Furthermore, the minimal tax liability is calculated using financial accounting rather than tax accounting and therefore necessitates the use of several data points that aren’t used for any other purpose. The onerous reporting requirements imposed by the Model Rules will reflect this. As a result, MNEs will be required to keep massive volumes of data, including historical and non-tax data, necessitating the usage of technology. MNEs should also keep an eye on activities in relevant countries relating to the implementation of new laws via domestic tax reforms and bilateral/multilateral agreements.

Under the model guidelines, the phrase “permanent establishment” has also been defined. It has undoubtedly increased MNE compliance in terms of filing a GloBE Information Return with the tax administration in order to give information on the MNE’s tax computations performed under the GloBE Rules no later than 15 months after the Reporting Fiscal Year’s final day.

A WAY FORWARD

While the publication of the Model Rules is an important step forward in the BEPS 2.0 initiative, there is still a lot of work to be done before 2023. Stakeholders are looking forward to the publishing of the comments in early 2022, as well as the subsequent development of the implementation framework. This is also a chance for stakeholders to communicate with the Indian tax administration on issues related to the new regime’s predictability, simplicity, and administrability.

In light of the foregoing, while the introduction of the minimum tax proposal into Indian tax legislation by a proactive Budget FY23 cannot be ruled out entirely, given the interconnected nature of the rules and the awaited explanatory framework, India would be wise to delay amending domestic law until it has thoroughly examined its impact on its tax policy and business environment.

India Inc. and the Indian government, on the other hand, may keep their eyes on the expected model provisions for the Subject-To-Tax Rules (STTR), which may be more important for developing nations like India. The STTR will allow nations to keep their right to tax certain payments (such as interest and royalties) made to related parties in other countries that are subject to low tax rates owing to treaty advantages. The STTR model provisions and the OECD public comment on them are planned to be released in early 2022.

India hopes to make gains from Pillar Two over Pillar 1 and has informally expressed a preference to apply STTR on base erosion payments; we expect the Budget 2022 to provide the heavy lifting on India’s position to jump-start the practical application of the template and give life to these rules.

Companies must stay involved in the process to understand the impact of the new tax structure on their businesses, organizational hierarchies, and supply networks, and, if necessary, implement mitigating steps to avoid being caught off guard.


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