On October 13, Finance ministers of G-20 countries are to finalize the Organization of Economic Co-operation and Development (OECD) tax deal in Washington.
136 countries, including India have agreed to abide by the major international tax reform, which will ensure that multinationals pay a minimum tax of 15% on their overall income from 2023 and if profits are above the threshold, they will have to pay taxes in the market jurisdiction where they do business. These are the two pillars solution of the global tax deal.
Finance Minister Nirmala Sitharaman had earlier stated that India is in the final stage of finalizing the deal and suggested that more work is to be done to ensure meaningful revenue for the benefit of developing countries by introducing a sustainable and inclusive tax regime, in the G-20 conference of Finance ministers, last week.
However, the deal wants countries to end other digital service tax imposed on multinationals and commit not to implement similar tax policies in the future before adhering to the global tax deal.
Henceforth, India must end Special Economic Presence (SEP) or digital permanent establishment and equalization levy, which were introduced in May and made applicable from April. SEP and OECD multinational tax policy cannot co-exist in the country.
SEP rules allow the government to tax multinationals that do not have a presence in India, but their transaction is Rs.2 crores or more in a year or have at least 3 lakh user base in the country.
Any company which meets the above criteria is identified as “digital permanent establishment”.
The SEP rules were instituted to target e-commerce companies and unicorn startups, that escape paying taxes despite having many users or significant revenue.
The OECD said there will be no newly enacted digital services, taxes or other similar measures imposed on any company starting from October 8 and until earlier of December 31,2023.
However, developing economies are expected to benefit by generating more revenue than the advanced countries through the implementation of the multinational tax regime, stated OECD.
“Governments around the world need to be able to raise the necessary revenue to fund the essential public services and support that their populations require and expect, in a way that is efficient, least distorting and also fair and equitable”, said Mr. Cormann, General Secretary of OECD.
He added that the combined effect of the globalization and the digitalization of our economies has caused distortions and inequities which can only be effectively addressed through a multilaterally agreed solution.
The Organization for Economic Co-operation and Development has joined hands with more than 100 countries to promote policies to improve the economies and social well-being of people around the world.