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India and 129 nations have backed a proposed global tax deal that is seen as an answer to “aggressive tax planning" by corporations and the challenges in taxing the largest gig economy firms that serve local consumers remotely. Mint takes a look at what is there in it for India.

Why was a global tax regime proposed?

Companies have long been taking advantage of countries with low tax rates to artificially lower their tax outgo in the markets where they actually make money. With complex intra-group arrangements related to management of intellectual property rights, and by assigning various business functions and risks across group units, profits are shown for the unit set up in low tax jurisdictions rather than where the business actually happens. The explosive growth in digital economy has accentuated this trend of shifting profits. Such erosion of the tax base has prompted nations to come together for a global deal.

What does this deal seek to achieve?

It seeks to address the concerns of both developed and developing countries regarding corporate taxes. For example, the US wants to raise corporate tax from the current 21% to help pay for higher infrastructure spending, but doesn’t want to become a less attractive destination for investors. An agreement can thus help reduce the tax arbitrage for investors, given that the tax is low in some countries now (12.5% in Ireland, for instance). On the other hand, emerging markets like India are big consumers of digital services and want a share of the profits global technology giants make on their soil.

Taxation deal terms
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Taxation deal terms

What will be the potential impact of this pact on India?

There’s no need for India to tweak its corporate tax rate as it’s already either on a par with or above the proposed 15% global minimum tax. India will get new taxation rights over offshore digital economy companies accessing Indian consumers. Once the deal materializes, India will remove its equalization levy on digital economy firms.

What other provisions are part of the deal?

Besides a global minimum tax of 15%, markets for MNCs will get taxation rights. MNCs with global sales above €20 billion and profit before tax above 10% will be covered initially by the global tax. In addition, countries will be able to tax any MNC with revenues of €1 million or more in that market. This is way above what India wants—to tax any MNC making over 2 crore (€226,000) in revenues. For smaller nations with GDP lower than €40 billion, OECD proposed a tax threshold of €250,000 revenue in profit before tax.

What are India’s priorities henceforth?

India expects the understanding reached earlier this month at a meeting of the Organization for Economic Cooperation and Development (OECD) in Paris to end in a global tax deal by October. While OECD’s July announcement gives the broad contours of the regime, finer details are yet to be negotiated. India stated on 2 July that some issues, including the share of profit allocation to market countries, remain open and need to be addressed. Also, India wants the new framework to be sustainable and easy to implement.

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