Pillar Two tax regime unlikely soon as India proceeds with caution

The Union government does not anticipate more than Rs 100-200 crore in additional revenue after adopting Pillar 2, and that too only under specific circumstances. Therefore, it is proceeding cautiously and is unlikely to implement the rules anytime soon, according to a senior finance ministry official who requested anonymity.

 

"An internal analysis indicates that the government is likely to see only an additional revenue of Rs 100-200 crore after implementing Pillar 2, and that’s only under certain conditions," an official stated. “The gains are not much, and losing the right to make laws for such a small amount is a big price to pay,” the source added.

 

The source further added that the union government is of the view that it might have to give away its “sovereign right” to frame laws on corporate taxation, if it implements the Pillar 2-tax regime.

   

“Adopting Pillar 2 could potentially restrict India's tax policy autonomy. It sets a 15 per cent minimum tax on multinational corporations, diminishing the country's ability to offer competitive tax rates to attract foreign investment. It also necessitates adherence to specific rules like Income Inclusion and under taxed payment rules, potentially limiting India's flexibility in customizing tax laws according to its economic objectives,"said Raju Kumar, Tax Partner, EY India.

 

India, along with approximately 130 other countries, has signed the Organization for Economic Co-operation and Development (OECD’s) Multilateral Convention to Implement Tax treaty related measures to prevent Base Erosion and Profit Shifting (BEPS). As a result, the Indian government will eventually enforce the associated regulations. These rules are designed to curb profit shifting by multinational corporations to low-tax jurisdictions, thereby minimizing their tax liabilities.

   

“Pillar Two is consistent with existing treaties and may not require a multilateral convention (except for STTR). Therefore, the Government may not lose its sovereign right to tax literally. However, yes, the tax rules that are implemented such as qualified domestic minimum top-up tax (QDMTT), Income Inclusion Rule (IIR), Undertaxed profits rule (UTPR), etc. have to meet the Pillar 2 set standards given this is a consensus based multilateral tax reform,” said Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co.

   

The Pillar 2 Global Anti-Base Erosion (GloBE) Rules establish a global minimum tax for multinational enterprises (MNEs) to discourage profit shifting. These rules require MNEs to maintain a minimum Effective Tax Rate (ETR) of 15 per cent in all jurisdictions where they operate. MNEs are defined as entities with a global turnover exceeding 750 million euros.

 

The Pillar 2 Global Anti-Base Erosion (GloBE) Rules establish a global minimum tax for multinational enterprises (MNEs) to discourage profit shifting. These rules require MNEs to maintain a minimum Effective Tax Rate (ETR) of 15 per cent in all jurisdictions where they operate. MNEs are defined as entities with a global turnover exceeding 750 million euros.

   

Currently, around 30 countries have adopted the Pillar 2 framework, part of the 130 nations that signed the relevant multilateral convention. While the United States has yet to implement this regime, several European Union countries have already done so.

 

Kumar further added that the adoption may enhance India's global standing and provide a more predictable investment climate, suggesting a strategic advantage in aligning with international tax norms.  Decoding the rule 

> The Pillar Two GloBE rules establish a global minimum tax for multinational enterprises (MNEs) to discourage profit shifting

> Rules require MNEs to maintain minimum effective tax rate of 15%

> Currently, around 30 countries have adopted the Pillar Two framework 

> Adoption may enhance India's global standing and provide a more predictable investment climate, say experts