India is gearing up for a significant overhaul of its tax system by aligning with the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). A key part of this alignment is the adoption of Pillar 2, which mandates a global minimum corporate tax rate of 15% for multinational corporations (MNCs). This move is expected to be integrated into the Income Tax Act, 1961, as part of a comprehensive review, with the changes likely being introduced in the FY26 Budget.
The global minimum tax aims to stop MNCs from moving their profits to countries with lower tax rates, ensuring that companies pay at least a 15% Effective Tax Rate (ETR) in all countries where they operate. Let’s take a deeper dive into how this rule will shape India’s tax environment and what it means for MNCs operating in the country.
Understanding Pillar 2 and Its Significance
Pillar 2 is part of a two-pillar solution developed by the OECD/G20 BEPS Inclusive Framework to address the challenges posed by digitalization and globalization to tax systems. While Pillar 1 focuses on reallocating taxing rights over the profits of the largest MNCs, Pillar 2 ensures a global minimum tax of 15%. This prevents MNCs from eroding the tax base by transferring profits to countries with low or no taxes, often referred to as tax havens.
For India, adopting this framework is a step toward preventing Base Erosion and Profit Shifting (BEPS) and securing a more stable tax base. It will also ensure that large companies are paying their fair share of taxes, contributing to the nation’s revenue while discouraging harmful tax practices.
Key Features of the 15% Minimum Corporate Tax
The 15% minimum corporate tax rule, also known as the Global Anti-Base Erosion (GloBE) rules, is a game changer for international tax systems. Let’s break down the key components:
1. Global Turnover Threshold
The minimum tax will apply to MNCs with a global turnover exceeding 750 million euros. This ensures that only the largest corporations, often with the means to exploit tax loopholes, are affected by the new rules.
2. Minimum Effective Tax Rate (ETR)
Under this framework, all MNCs will need to pay a minimum ETR of 15% in every country where they have significant operations. If an MNC’s ETR falls below this threshold in a particular jurisdiction, the difference (or top-up tax) will be collected to ensure the global minimum tax rate is met.
3. Qualified Domestic Minimum Top-up Tax (QDMTT)
India’s adoption of the QDMTT will allow the government to collect additional taxes from MNCs that report profits in low-tax jurisdictions. This will prevent India from losing out on tax revenues that would otherwise be claimed by other countries with similar tax mechanisms.
4. Income Inclusion Rule (IIR)
The Income Inclusion Rule ensures that the parent company of an MNC is responsible for paying any top-up tax if its subsidiaries in other countries pay an effective tax rate below the 15% minimum.
5. Undertaxed Profits Rule (UTPR)
The UTPR applies when an MNC avoids the top-up tax through complex corporate structures. In this case, other countries where the MNC operates can collect the underpaid tax, ensuring that all profits are taxed at the global minimum rate.
6. Subject to Tax Rule (STTR)
The STTR ensures that income derived from cross-border payments, such as royalties or interest, is subject to a minimum tax rate. This will prevent companies from exploiting tax treaties to shift profits to low-tax jurisdictions.
How India’s 15% Minimum Tax Will Impact MNCs
The introduction of the 15% minimum corporate tax rule will have significant implications for both foreign and Indian MNCs. These companies will need to adjust their tax planning strategies and make necessary changes to their financial reporting, data management, and accounting policies to comply with the new regulations.
1. Increased Compliance Costs
MNCs operating in India will have to ensure compliance with the new rules, which may lead to increased compliance costs. Companies will need to overhaul their internal tax systems and reporting processes to accurately calculate the ETR and account for any top-up taxes that may be owed.
2. Tax Incentives in GIFT City
The impact on tax incentives, particularly those offered in GIFT City (Gujarat International Finance Tec-City), will be closely watched by MNCs. The QDMTT may reduce the effectiveness of these incentives, leading to changes in how companies use tax-efficient hubs like GIFT City.
3. Implications for Indian MNCs
Indian MNCs will also be affected by the global minimum tax. They will need to account for top-up taxes in their financial statements for the fiscal year ending March 2024, which could impact their overall tax liability.
Boost to India’s Tax Revenues
The introduction of the global minimum corporate tax is expected to boost India’s tax revenues. By collecting top-up taxes from MNCs operating in low-tax jurisdictions, India can safeguard its tax base from erosion. However, the actual extent of revenue gains will depend on how other countries respond, particularly low-tax jurisdictions that may implement their own versions of the QDMTT.
Challenges in Implementation
While the 15% minimum tax is expected to have positive effects, there are potential challenges in its implementation:
1. Global Cooperation
For the rule to be fully effective, it requires global cooperation. If certain countries, especially low-tax jurisdictions, do not implement similar tax rules, MNCs could continue to find ways to reduce their ETR below the 15% threshold.
2. Complexity in Financial Reporting
MNCs will face increased complexity in financial reporting and data management. They will need to ensure that their accounting practices are transparent and in line with the new regulations, which could involve significant investment in compliance technologies.
3. Potential Legal Disputes
The introduction of the new tax rules could lead to legal disputes, particularly concerning tax treaties and double taxation agreements. MNCs may challenge certain aspects of the QDMTT, especially if they feel the tax burden is unfair.
What’s Next for India?
As part of the ongoing review of the Income Tax Act, 1961, the Indian government is expected to introduce enabling provisions for the 15% minimum corporate tax in the FY26 Budget. The Central Board of Direct Taxes (CBDT) will notify the relevant rules after consulting with stakeholders. Once implemented, this move will align India with the global effort to ensure a fairer and more transparent tax environment.
Conclusion
The adoption of the 15% minimum corporate tax rule is a monumental shift in India’s approach to taxation. By aligning with the OECD/G20 BEPS framework, India is taking a decisive step toward preventing tax base erosion and ensuring a more level playing field for both domestic and international corporations. While the rule will undoubtedly lead to increased compliance requirements for MNCs, it also promises to boost India’s tax revenues and create a more stable and equitable tax system.