Contributed by Arjun Kapur and Swati Pawar

Introduction

The taxation landscape in an increasingly interconnected global economy is undergoing a seismic shift. The introduction of the Global Minimum Corporate Tax (“GMCT”), spearheaded by the Organisation for Economic Co-operation and Development (“OECD”) and the G20, represents a monumental effort to address the challenges of tax base erosion and profit shifting by multinational corporations (“MNCs”). Regardless of where they operate, this program, embodied in the Two-Pillar Strategy, aims to guarantee that big businesses pay their fair share of taxes.

The ramifications of this tax revolution are significant for India, a fast-growing economy with a burgeoning digital and global corporate presence. The Two-Pillar Strategy aims to level the playing field by reducing tax evasion and creating new opportunities for economic expansion and revenue creation. India must skilfully balance its obligations to the world and its interests as it traverses this challenging but fertile terrain.

This research blog explores the intricacies of the GMCT and India’s possible strategic placement within this ever-changing framework. We will analyse the subtleties of the Two-Pillar Strategy, evaluate how it might affect India’s economy, and discuss the policy changes needed to realise its advantages fully.

What is the GMCT?

A GMCT is proposed to impose a minimum rate of taxation on corporate income in most countries of the world through an international agreement. This would apply a standard minimum tax rate to a defined corporate income base worldwide. This Framework aims to discourage nations from tax competition through lower tax rates that result in corporate profit shifting and tax base erosion. The OECD developed a proposal featuring a corporate minimum tax of 15% on foreign profits of large MNCs, which could give countries new annual tax revenues of $150 billion.

A global corporate minimum tax is a standard minimum rate of tax on corporate income adopted by individual jurisdictions under an international agreement. This would discourage MNCs from making foreign investment decisions on the basis of low tax rates and shifting profits from high tax to lower tax jurisdictions regardless of where the profits are earned.

The OECD plan is intended to counter efforts by low-tax countries to attract investment away from higher-tax jurisdictions. It addresses the widespread transfer of income earned from intellectual property (“IP”), increasingly from digital products and activities away from high-tax jurisdictions where the income is earned to lower-tax ones where the IP rights are strategically registered and owned.

OECD knows that tax laws in other countries also vary in design and complexity, resulting in very different income tax bases and rules. However, to be recognised as fair and to achieve acceptance, a global corporate minimum tax requires a standard definition of income. That’s why the OECD decided that its agreement applies only to companies with revenues above €750 million ($868,095), and it all led and gave birth to a global minimum tax regime called GMCT.

Understanding the Two-Pillar Plan

This comprehensive plan addresses the complexities and inequities of taxing multinational corporations in the digital era. Understanding the Two-Pillar Plan is essential to grasp the future trajectory of global and Indian tax policies.

Pillar One: Taxing Rights and Market Presence

The distribution of taxation rights is radically redesigned by Pillar One, which focuses on market jurisdictions where money is made regardless of physical presence. In the past, tax regimes established tax responsibilities based on physical presence. In the digital age, when global firms make significant profits without a physical presence in many nations, this must be improved. This pillar mainly targets big, international IT enterprises and digital businesses that frequently use digital platforms to do business internationally. Pillar One ensures these companies pay taxes in the nations where their users and customers reside by reallocating taxing rights. For India, a country with a burgeoning digital economy and a vast consumer base, this reallocation promises significant tax revenue from digital transactions within its borders.

Pillar Two: Global Minimum Tax Rate (15%)

By guaranteeing that profits be taxed at least 15% globally, Pillar Two imposes a minimum tax rate of 15% on multinational firms to reduce tax competitiveness and prevent base erosion. By offering low corporate tax rates to entice businesses, nations weaken the global tax base and unfairly transfer burdens. This change aims to end the “race to the bottom.” Establishing a worldwide floor prevents profit shifting to tax havens and guarantees that all nations, including emerging countries like India, can collect equitable tax payments from MNCs. This global minimum tax might increase corporate tax collections in India, improve public finances, and promote economic development, even though it would be difficult for low-tax nations.

Therefore, an essential step towards fair and efficient taxation in the global economy is the GMCT Revolution’s Two-Pillar Strategy. It charts a progressive course for India’s economic future by promising increased tax collections and a more equitable way of taxing internet and international corporations.

Potential Ramifications for India

The implementation of the GMCT through the Two-Pillar Strategy presents considerable hurdles and prospective rewards to India. One of Pillar One’s main benefits is the improved capacity to tax MNC revenues, particularly those in the digital economy. Digital behemoths like Google, Facebook, and Amazon have previously reduced their tax obligations by doing business in countries with advantageous tax laws. Pillar One allows India to get a cut of the money these multinational corporations make from Indian consumers, guaranteeing that their significant domestic economic activity is taxed. This change will significantly increase India’s tax income, bringing much-needed money for social programs, healthcare, and infrastructure.

The increased parity where MNCs pay their fair share of taxes under the more equitable tax structure that the GMCT seeks to establish in tax collection is essential for India, where local businesses frequently pay more taxes than their foreign counterparts. The GMCT can help level the playing field and create a more equitable competitive climate for Indian enterprises by guaranteeing that MNCs pay taxes to India.

However, the GMCT has drawbacks as well. It restricts India’s capacity to entice foreign investment by providing tax breaks or reduced corporate tax rates. India has historically used tax breaks to attract MNCs, promote economic expansion, and generate employment. Such incentives might be curtailed under the incoming administration, which could result in a drop in FDI. This shift may call for a review of the country’s fiscal policy to preserve India’s appeal as an investment destination without sacrificing revenue.

There would be substantial administrative difficulties in putting GMCT policies into effect and upholding them. India’s tax infrastructure will require significant improvements to manage the intricacies of the new system. This entails creating systems to precisely determine the portion of income attributable to MNC operations in India and guaranteeing adherence to international norms.

Sector-Specific Implications for India

While the notification of thresholds for Significant Economic Presence (“SEP”) and the 2019 proposal regarding profit attribution may not have a substantial revenue impact on companies, concerns about the timing of these notifications and proposals are valid. Even if a new measure does not lead to increased tax liabilities for companies, the overall messaging from the government and the resulting uncertainty can be troubling. The perceived political motivations behind these proposals can distort perceptions and create a more unpredictable environment for businesses. As digitalisation increasingly shapes business models, there is a growing likelihood that a stable international tax framework will emerge in GMCT that is capable of adapting to long-term changes in these models. This aligns with principles established in the Ottawa Electronic Commerce: Taxation Framework, emphasising neutrality, efficiency, certainty, and simplicity. The impact of Pillar One on digital multinationals like Google, Facebook, and Amazon operating in India is expected to be beneficial, as it will replace various disparate proposals with a more stable system, thereby reducing the uncertainty that might otherwise exist.

Conclusion

India continues to be an appealing destination for investment, as business leaders prioritise factors such as growth potential, political and economic stability, and a skilled workforce when selecting investment locations. India excels in its skilled labour pool and prospects for economic growth, which contribute to increasing FDI. The GMCT aims to ensure that MNCs pay a minimum level of tax regardless of their headquarters, which could diminish the incentive for these companies to shift profits to low-tax jurisdictions. This shift may enhance India’s attractiveness by levelling the competitive landscape. Implementing the GMCT could also convey regulatory stability and a commitment to fair taxation, critical considerations for investors contemplating long-term investments.

India must, therefore, manage possible revenue losses from decreased tax incentives and overcome significant compliance and administrative challenges to secure its economic future while retaining a competitive edge in luring investment, even though the GMCT and the Two-Pillar Strategy promise higher tax revenues and greater fairness.