175 MNEs ready to comply with new global tax rules

About 175 multinationals operating in India, which have consolidated global turnovers of over Euro 750 million, have reviewed their current tax structures and frameworks comprehensively in anticipation of forthcoming regulations concerning minimum taxation.

As per the PwC study, around 175 arms of multinationals operating in India qualify for consideration under the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two regulations.

The rule applies to any multinational company that is part of a multinational group with annual revenue of Euro 750 million or more in the consolidated financial statements of the Ultimate Parent Entity for at least two of the four fiscal years just before the tested fiscal year.

Under the “Global Anti-Base Erosion” or “GloBE” Regulation, the Pillar Two Model Rules are crafted to ensure large multinational enterprises (MNEs) pay a minimum level of tax (at least 15%) on the income arising in each jurisdiction where they operate.

In India, Pillar Two provisions may be incorporated into either the February 2024 vote-on-account budget or the full-fledged budget in July 2024 with the possibility of the government sharing a draft law or rules for consultation, say tax experts.

“Pillar Two is already a reality, with it being effective in several countries with effect from January 1, 2024. Given the rapid pace of implementation globally, India may not want to be left behind in implementing Pillar Two. So, India might make some announcements in the first full budget after the elections, if not earlier. About 175 MNEs are operating in India that will be impacted due to these regulations,” said Sanjay Tolia, Partner Price Waterhouse & Co. LLP.

Tax experts say that though all large Indian arms of MNCs have undergone a tax analysis as part of the global tax exercise, most won’t incur additional taxes in India under the current tax structure.

“Multinationals operating in India should not be impacted, as the lowest rate of corporate tax in India (on new manufacturing units) is above the minimum threshold of 15%. However, if any MNC has invested in India through an intermediate jurisdiction that happens to have a tax rate below 15%, there could be additional tax impact for the MNC in its home country. Even in this structure, India will not obtain any additional tax revenues given the lowest rate rate of tax is over 15% in India, “explained Sudhir Kapadia, Partner, Tax and Regulatory Services, EY India.

PwC’s Tolia said that Pillar 2 is an unprecedented change in corporate international taxation.

“Tax functions and related stakeholders must prepare in detail for the end-to-end process to undertake Pillar Two compliance. With around 260 data points, most outside of ERP systems, the approach to recording and collecting data will be one of the most critical elements of Pillar Two readiness,” he said.

Countries like Austria, Denmark, Belgium, Germany, France, Sweden, Italy and EU jurisdiction have already enacted final Pillar Two legislation that includes IIR (Income Inclusion Rule), QDMTT (Qualified Domestic Minimum Top-up Tax), and UTPR (Under-Taxed Profit Rule), among other provision. These three provisions are key to making sure that a global minimum tax rate is established and profit shifting by multinationals companies are prevented.

Canada, Norway, Spain and New Zealand have introduced draft legislation that covers one of the above-listed provisions. Low-tax countries like Bermuda, the UAE and Barbados have also started introducing corporate income tax.

In October 2021, countries in the OECD/ G20 Inclusive Framework agreed on a plan with two pillars to change international tax rules because of digital technology’s impact on the economy.

Source: The Economic Times