Trump's exit from tax deal may not hit India from collection standpoint

The decision of the Trump administration to withdraw from the OECD's global tax deal will not have any impact on India, but it will severely affect the progress made thus far in reaching an international consensus on global minimum tax, experts said on Tuesday.

Soon after taking charge, US President Donald Trump in a Presidential memorandum said that the "Global Tax Deal have no force or effect within the United States", thus nullifying the progress made so far by the Organisation for Economic Cooperation and Development (OECD) to bring 140 countries on the same platform to levy a minimum 15 per cent tax on profits of multinational corporates. 

 

Nangia & Co LLP Managing Partner Rakesh Nangia said the impact of the US pulling out of the global tax deal would have monumental impact on the global tax landscape, especially for countries/jurisdictions which have already adopted/formulated rules in their domestic law for implementing Global anti-Base Erosion Model or GloBE rules (Pillar 2).

Around 50 jurisdictions have already adopted or made significant strides towards adoption of GloBE rules. These jurisdictions will have to now undertake a course correction to adjust to the new realities.

"India, on the other hand, have always adopted a 'wait and watch' policy on adoption of GloBE rules and has yet to introduce any substantial legislative change in this direction," Nangia said.

Further, in Union Budget 2024, India also abolished the 2 per cent equalisation levy (which, being a unilateral action, was a bone of contention for the US).

"Thus, US pulling out of the global tax deal would not have much impact to India purely from a tax collection standpoint, however, this decision is going to severely impact the progress made thus far in reaching a international consensus and may potentially also force OECD to go back to the drawing board," Nangia said.

In 2021 nearly 140 countries signed the OECD's global tax deal. The two-pillar solution aimed to address "race to the bottom" approach of global tax competition and discourage cross-border tax avoidance by firms. Pillar 1 aimed to reallocate the residual profits of large multinationals from their home countries to jurisdictions where they generate revenue, and Pillar 2 establishes a 15 per cent global minimum corporate tax.

"Earlier remarks of Mr. Trump and other Republican lawmakers left little to no doubt about US's position on the OECD's global tax deal it was never a question of 'if' but a question of 'when!'," Nangia said.

Tax and consulting firm AKM Global, Head of Tax Markets, Yeeshu Sehgal said OECD's pillar 2 initiative sets a minimum tax rate of 15 per cent for every country that is signatory to it. This has caused a lot of concerns for the US because their current tax rules might conflict with this new global minimum tax.

One concern is that some US companies might end up paying tax twice on the same income. Another issue is that the new rules might change how taxes are calculated, potentially increasing the burden on US companies with operations in other countries, he said.

"India, on the other hand, has adopted a wait and watch approach. They're watching closely to see how these issues play out before making any decisions. They want to make sure the new rules are clear before they implement in their domestic tax law," Sehgal said.