Global tax deal: Impact analysis done, govt may talk on Pillar 2 in Budget

Experts suggest India is still iffy on Pillar 1 and the equalisation levy may be extended beyond June 30

The Multilateral Convention (MLC) for Pillar 1 of the landmark global tax deal is unlikely to be signed by the June 30 deadline, but India may announce its roadmap on Pillar 2 in the upcoming Budget, according to experts following the developments.

In 2021, more than 135 countries signed a two-part political agreement that represented the biggest corporate tax reform in more than a century. It was brokered by the Organisation for Economic Co-operation and Development (OECD) and targeted mainly at tax havens, often called "investment hubs" by companies.

The first "pillar" of the agreement was aimed at reallocating the taxing right on companies, making them pay more tax in the place they do business.

The second "pillar" sought to bring in a minimum 15 per cent corporate tax rate for multinationals with annual global revenues higher than 75 crore euros.

The Paris-based OECD initially said that the initiative would increase global corporate tax revenues by up to $22,000 crore a year but later brought it down to $15,500-19,200 crore yearly.

A lot of progress has been made on the second pillar. Over 30 countries, including the UK, South Korea, Japan, and Canada, have already started applying the rules under it from 2024. However, the USA and China have not. India, according to experts, is likely to make an announcement about it in the upcoming Budget.

"As far as Pillar 2 is concerned, there is an expectation that the draft legislation or India's roadmap will be shared with the stakeholders in the upcoming Budget," said Riaz Thingna, Partner, GT Bharat.

Adding to this, Sanjay Tolia, Partner, Price Waterhouse & Co LLP, said that around 150 Indian MNCs are covered under this pillar. For these Indian MNCs, if the effective tax rate (ETR) of their subsidiary or branch in a country where they operate is below 15 per cent, they will have to pay a top-up tax.

"Most Indian MNCs have completed the impact analysis of where and how much top-up tax they need to pay, where applicable," he said. "These should generally form part of tax provisions for financial statements for 2024-25."

The ICAI has also issued a guidance note recently for reporting on Pillar 2's impact on the MNC. Moreover, a 3-year transitional safe harbour rule has also been designed. It leverages these Indian MNCs preparing their annual Transfer Pricing Country by Country Reporting (CBCR) documentation.

"MNCs are evaluating the same," Tolia added.

Sumit Singhania, Partner, Deloitte India, said that on a net impact basis, India would gain under the minimum tax solution as its headline tax rate and average corporate effective tax rate is largely aligned with (or is higher than) 15 per cent.

He, however, added, "Any policy agreement would largely revolve around getting a finer deal on Pillar 1 global solution and sharing of revenues without having to concede any sovereign tax policy-making prerogative."

The countries had fixed the last date to sign the MLC for Pillar 1 on June 30. However, it is yet to be ratified by major countries like the USA, China, and India. In the US, it faces strong opposition from the Republicans, and international tax treaties require a 67 per cent majority in the US Senate for ratification.

According to Thingna, India has taken a "wait-and-watch" approach on the first pillar, "particularly because the impact of the changes on India’s revenue has not been sufficiently measured."

Since 2020, India has been imposing an equalisation levy (EL) of 2 per cent on the e-commerce supply of services. This was also later imposed on such services from the US. It was to be removed on March 31, 2024, or at the implementation of Pillar 1. However, on Friday, the Finance Ministry and the US Department of Treasury announced the extension of this levy till June 30.

Experts said that now that the agreement hangs in balance, the equalisation levy may be extended further.

"The most likely scenario at this stage is that the USA will not sign or ratify the treaty just yet and from the Indian perspective, the Equalisation Levy will continue in the short run," Thingna said.