OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS)

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    India has joined the Organisation for Economic Co-operation and Development (OECD) and G20 Inclusive Framework tax deal of global corporate tax.

    About

    • The deal seeks to reform international tax rules and ensure that multinational enterprises pay their fair share wherever they operate. 
    • Around 130 countries, representing more than 90 percent of global GDP, adopted the global corporate tax rate of at least 15 percent. 
    • The countries also agreed on a fairer distribution of ‘profits and taxing rights with respect to multinationals including digital giants such as Amazon and Google.

    Two Pillars of Framework

    • The framework has two pillars, one dealing with transnational and digital companies and the other with low-tax jurisdictions to address cross-border profit shifting and treaty shopping.
    • The first pillar ensures that large multinational enterprises, including digital companies, pay tax where they operate and earn profits. 
      • Most such companies have so far been paying low taxes by shifting profits to low-tax jurisdictions. 
      • Under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year.
    • The second pillar seeks to put a floor under competition among countries through a global minimum corporate tax rate, currently proposed at 15%. This is expected to generate an additional $150 billion in tax revenues. 

    Image Courtesy: ET

    Outcome

    • If implemented, countries such as the Netherlands and Luxembourg that offer lower tax rates, and so-called tax havens such as the Bahamas or British Virgin Islands, could lose their sheen.

    Equalisation levy

    • In 2016, India imposed an equalisation levy of 6% on online advertisement services provided by non-residents. This was applicable to Google and other foreign online advertising service providers.
    • From April 1, 2020, the government started imposing a 2% equalisation levy on digital transactions by foreign entities operating in India or having access to the local market.

    Conclusion

    • India will need to evaluate the revenue expected under the new rules against what it gets from the equalisation levy, besides examining their applicability.

    Base erosion and profit shifting (BEPS)

    • Base Erosion and Profit Shifting (BEPS) indicate tax avoidance strategies that Multinational Corporations (MNCs) employ for reducing their tax bases.
    • Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually.

    Source: AIR