7th February 2025 (13 Topics)
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OECD Global Tax Deal
Context
India is considering whether it should continue its participation in the OECD's global tax deal following the United States' decision to withdraw from the pact. US’s exit effectively nullified the progress made by the OECD in bringing together 140 countries to agree on a global minimum tax of 15% for profits made by multinational corporations.
About OECD Global Tax Deal
- The Organization for Economic Co-operation and Development (“OECD”) Global Tax Deal is a groundbreaking international agreement to overhaul how multinational corporations are taxed.
- In 2021, nearly 140 countries signed the OECD's global tax deal.
- The deal emerged from the Base Erosion and Profit Shifting (“BEPS”) project, launched in 2013 to combat tax avoidance by multinational corporations
- Its purpose is to create a more unified international tax regime, with the U.S., home to several of the world’s largest multinational corporations like Google and Amazon, playing a pivotal role in pushing the negotiations forward.
- The deal introduces a two-pillar framework aimed to address the "race to the bottom" approach of global tax competition and discourage cross-border tax avoidance by firms.
- Pillar 1 aims to reallocate the residual profits of large multinationals from their home countries to jurisdictions where they generate revenue
- Pillar 2 establishes a 15 per cent global minimum corporate tax.
Implications of U.S. Pullout:
- Global Tax Coordination:With the U.S. withdrawing from the deal, it could lead to uncertainty in global tax coordination. The U.S. has historically been a key player in international economic agreements, and its absence may reduce the effectiveness of the Global Tax Deal.
- Impact on U.S. Multinationals:The withdrawal could benefit tech giants by ensuring that they do not face additional tax liabilities in other countries, especially those related to top-up taxes under the OECD agreement. These companies would continue to avoid the 15% minimum tax in foreign jurisdictions, potentially reducing their overall tax burden.
- Impact on India:India, like other countries, could face challenges in enforcing tax policies on global digital services. The U.S. withdrawal from the deal may limit India's ability to apply top-up taxes on U.S. multinational corporations operating in India. Additionally, India's proposed 2% equalization levy on foreign tech giants might come under pressure if other countries align their tax policies with the OECD framework. This could affect India’s ability to generate revenue from international tech firms.
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