Upcoming Marrakech meet: Global deal for 15% min tax on MNCs on anvil

The global tax system is on the brink of an overhaul in terms of rights of taxation. Indian tax administrators and policymakers are likely to discuss the road map and related strategies for the implementation of new global tax norms during a special session in the Moroccan city of Marrakech this week.

The talks come at a critical time as India, along with other developing nations, is actively negotiating and progressing on the implementation of a minimum effective tax of 15 per cent on multinationals wherever they have a market presence.

On the implementation front, in the fourth and final meeting with its G20 allies, India is expected to discuss the procedural aspects of Pillar 2 of the proposed global tax deal. This includes in-principle differences, the exchange of information between jurisdictions, and the status of ratifying the multilateral convention for prompt implementation and signing.

India is also expected to outline its roadmap for implementing Pillar 1 of the proposed deal, which would require amendments to domestic laws.

Senior revenue department officials, including Revenue Secretary Sanjay Malhotra, are expected to attend the session in Marrakech. 
 

“The negotiation is ongoing. It has been a long-standing request from developing countries, especially India, to consider markets as a predominant factor for taxation purposes,” said an official familiar with the matter.

The proposed Pillar 2 solution consists of two components. Pillar 1 aims to re-allocate a portion of non-routine profits of multinational companies to the market jurisdictions where they operate. Pillar 2 aims to introduce a global minimum corporate income tax of 15 per cent. The proposals are estimated to generate $150bn in additional global tax revenues annually, according to the Organization for Economic Co-operation and Development (OECD).

The second pillar of Pillar 2 solution calls for the adoption of a new subject to tax rule (STTR) and a worldwide minimum tax. STTR is a treaty-based regulation that may protect developing nations’ ability to tax some intragroup payments where those payments are subject to a nominal corporate income tax that is lower than the minimum rate.

“The implementation of both Pillar 1 and Pillar 2 are going to usher in a new era of tax regime for global multinationals. While Pillar 1 brings in a paradigm shift in the erstwhile principle of taxing profits based on physical presence to where customers are located, Pillar 2 tries to achieve a minimum rate of 15 per cent tax for all jurisdictions and incentivise businesses to plan operations and structures driven more by economic needs rather than tax rates,” said Parikshit Datta, senior partner at EY India.

India has been pressing G20 nations to take steps to protect developing countries from any unintended consequences due to the proposed global minimum tax agreement. Nearly one-third of the participants in the G20 inclusive taxation framework are from developing nations.

Since October 2021, over 137 jurisdictions have joined the proposed initiative to secure their taxation rights amid an emerging digital and global economy.

Starting in January 2024, multinational companies will have to comply with Pillar 2 global minimum tax regulations. To facilitate this, the OECD issued the multilateral convention on October 3 after the conclusion of talks on the OECD/G20 Inclusive Framework in September 2023.

The STTR MLI (multilateral instrument) may automatically apply in current bilateral tax treaties without requiring bilateral talks.

If certain payments from specific legal entities to their “connected persons” are subject to a tax rate below 9 per cent in the resident's jurisdiction, the STTR allows source governments to recoup some or all of its taxing powers.

Key elements of Pillar 2, the Global Anti-Base Erosion Model Rules (GloBE), and the STTR ensure that multinational corporations pay a minimum amount of tax on the income generated in each of the jurisdictions in which they operate.