India’s Budget for 2022-23 likely to initiate changes in domestic legislation following OECD model rules for 15% global minimum tax

The Organisation for Economic Co-operation and Development (OECD) released detailed rules for the implementation of a far-reaching global tax deal aimed at subjecting multinational enterprises (MNEs) to a 15% minimum tax from 2023.

OECD is keen that countries bring the Global Anti-Base Erosion (GloBE) rules into domestic legislation in 2022. India’s Budget for 2022-23 will likely spell out India’s position and start laying the legislative framework to incorporate these rules.

The minimum tax, known as Pillar Two, would discourage countries from competing to attract corporations by offering low tax rates. The new rules also let countries such as India impose an extra tax on companies not meeting a 15% effective minimum rate in another jurisdiction. Currently, an Indian multinational enterprise (MNE) could set up a unit in a zero-tax jurisdiction and legitimately pay no taxes there and not distribute profits back to India.

Under the OECD multilateral pact, India would get the right to tax them at the minimum rate of 15%. Pillar Two model rules provide governments with a precise template for taking forward the two-pillar solution to address the tax challenges arising from digitalisation and globalisation of the economy agreed in October 2021 by 137 countries including India and jurisdictions under the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS).

The rules define the scope and set out the mechanism for the GloBE rules, which will introduce a global minimum corporate tax rate.

The minimum tax would apply to MNEs with revenue above €750 million and is estimated to generate around $150 billion in additional global tax revenues annually. The GloBE rules provide for a coordinated system of taxation intended to ensure large MNE groups pay this minimum level of tax on income arising in each of the jurisdictions in which they operate. Pillar One would apply to MNEs with profitability above 10% and global turnover above €20 billion. The profit to be reallocated to markets would be calculated as 25% of the profit before tax over 10% of revenue. 

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