OECD rules to implement 15% tax rate on multinational entities out

The Organization for Economic Co-operation and Development (OECD) has come out with a template for countries to implement the global agreement on imposing minimum 15 per cent tax on the multinational entities (MNEs) having annual turnover of over €750 million. Experts believe that India would mention rules to adjust for this template in the Union Budget for 2022-23. 

“We expect the Budget to provide heavy lifting on India’s position to jump start the practical application of the template and give life to these rules,” said Aravind Srivatsan, tax leader and partner, Nangia Andersen. The template is for implementing Pillar 2 of the OECD agreement. Countries can make rules on this template in 2022 so that it could be implemented from 2023. 

Pillar-2 introduces a global minimum corporate tax rate at 15 per cent. The new minimum tax rate will apply to companies with revenue of above €750 million and is estimated to generate about $150 billion in additional global tax revenues annually. 

On the other hand, under Pillar 1, MNCs with global sales of above €20 billion and profitability above 10 per cent — the kind of companies that can be regarded as the winners of globalisation — will be covered with 25 per cent of profit above the 10 per cent threshold to be reallocated to market jurisdiction. This will generate additional tax revenues of $125 billion annually. 

Srivatsan said India hoped to make gains from Pillar 2 over Pillar 1. He said India can apply withholding taxes on those countries having operations in the country where the tax rate is less than 15 per cent. The global agreement on Pillar 2 provided a leeway for countries to impose withholding tax at the rate of 7.5-9 per cent. 

The template or model rules given by OECD prescribe the determination of excess profits, effective tax rate, adjusted covered taxes, jurisdictional top-up tax percentage for every low-tax jurisdiction, substance-based income exclusion in computing the Global Anti-Base Erosion (GloBE) income. These are complex rules and the principle of accounting consolidation of which parent entity would consolidate with its subsidiary or joint venture would also have to carefully consider the impact on Pillar 2 tax implications. 

“The manner prescribed for the calculation of effective tax rate, top-up tax, etc., would certainly increase the calculations of MNEs from a tax standpoint,” said Amit Mah­e­shwari, tax partner, AKM Global, a tax and consulting firm. The template addresses the treatment of acquisitions and disposals of group mem­bers and includes rules to deal with particular holding structures, said Shefali Goradia, partner at Deloitte India.

KEY POINTS 

• Rules prescribe method of calculation of excess profit, top-up tax, effective tax rate, etc 
• Pillar 2 introduces a global minimum corporate tax rate at 15 per cent
• This applies to companies with revenue of above 750 million euros
• This is estimated to generate around $150 billion in additional global tax revenues annually 
• Model rules do not tinker with threshold