OECD-G20 Inclusive Framework on BEPS

Why in news?

• A collection of 136 countries, including the G-20 member nations and the Organization for Economic Cooperation and Development, has agreed on the OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) after months of negotiations.

About the framework:

• The framework provides a two-pillar solution to address the tax challenges arising from the digitalisation of the global economy, as well as prevents a proverbial ‘race to the bottom’ by countries looking to slash tax rates to attract investment.

What are the ‘two pillars’?

• Pillar One:
  • It would ensure that large multinational tech companies like Amazon, Google and others pay more taxes in countries where they have customers or users regardless of where they operate from but may not have physical or intellectual property in all of those markets, which make it difficult to tax them.
  • Under this Pillar, which will be signed in 2022 and be enforced from 2023, multinational enterprises with global turnover above 20 billion euros and pre-tax profit above 10 percent of revenue (known as super normal profit) will have to pay 25 percent of the profit before tax.
  • This 25 percent will be divided among countries on a nexus-based allocation system, which will now be negotiated.
• Pillar Two
  • This pillar mandates a global minimum tax of 15 per cent
  • It was supposed to be implemented by 2023 but now has been deferred to 2024.
  • It is aimed to eliminate the concept of race to the bottom in terms of tax competition.
  • Even a tax haven like Ireland, which till recently was opposed to the proposal, and has a corporate tax rate of 12.5 percent, has agreed to come on board.
  • Consensus on minimum tax will practically make tax competition among nations rather unfeasible by narrowing down any such opportunities to rarest circumstances

What this means for India?

• India will have to end its equalisation levy/‘Google Tax’ by 2023.
• Google tax applies to non-resident e-commerce operators.
  • While it applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government widened the scope to impose a 2 per cent tax on non-resident e-commerce players from 2020-21. It covers players like Adobe, Uber, Zoom, Alibaba, IKEA, LinkedIn etc.
• The OECD has sought for an immediate and upfront withdrawal of unilateral Digital Services Tax (such as ‘Google tax’ of India) and a commitment not to introduce such measures in the future

PRACTICE QUESTION:

‘Inclusive Framework on Base Erosion and Profit Shifting (BEPS)’, sometimes seen in news, is associated with:

(a) World Bank

(b) OECD and G20

(c) World Trade Organization

(d) BRICS

Answer