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Global minimum tax: Will the budget offer a road map?
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Context
The advent of the Global Minimum Tax (Pillar Two), adopted by over 30 countries by 2024, represents a significant reform of international tax regulations aimed at curbing profit-shifting by multinational enterprises (MNEs) and ensuring a minimum tax level worldwide.
Mechanics and Implementation of Pillar Two:
- Functionality: Pillar Two mandates MNEs with global revenues above €750 million to pay a minimum effective tax rate (ETR) of 15% in each country they operate. If the ETR falls below this threshold, a top-up tax is levied.
- Tax Collection: The supplementary tax is collected by the country where the MNE’s parent company is based, with provisions for the subsidiary’s country to collect if compliant.
- Global Adoption: Over 50 countries are in various stages of implementing Pillar Two, including the UK, Germany, Japan, and Canada, with others like Singapore and Hong Kong to follow by 2025.
Impact on Multinational Enterprises:
- Compliance Requirements: MNEs need to assess their readiness for extensive data analysis, compliance, and reporting under the new tax regime.
- Effect on Tax Incentives: The global minimum tax affects existing tax incentives and holiday schemes, leading countries to redesign these to remain competitive while compliant with Pillar Two.
- Indian MNEs' Preparations: Many Indian MNEs have started impact assessments and are preparing for ongoing compliance and tax provisioning.
India’s Approach and Budget Expectations:
- Union Budget Roadmap: Anticipation surrounds India’s upcoming budget for a clear approach to Pillar Two implementation, which is likely to include consultations with stakeholders.
- Tax Incentives and GIFT City: The interaction of Pillar Two with India’s tax system, particularly regarding incentives for Gujarat International Finance Tec-City (GIFT City), needs careful consideration.
- Global Tax Fairness: Pillar Two represents a move towards global tax fairness, necessitating a shift in mindset and adoption of new technologies by MNEs.
UPSC Mains Questions:
Q.Analyze the role of international tax regulations, such as the Global Minimum Tax, in promoting global tax fairness and reducing profit-shifting by multinational enterprises.
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