Understanding India's Position on the OECD Two-Pillar Tax Framework

INDIA & OECD TAX DEAL: TWO-PILLAR FRAMEWORK

The OECD two-pillar framework is an international tax reform plan designed to tackle the tax challenges posed by the digital economy and ensure that multinational enterprises (MNEs) contribute fairly to the tax revenues of the jurisdictions in which they operate.

1. What is the OECD two-pillar tax framework?

The two-pillar framework consists of:

• Pillar One: This pillar reallocates taxing rights for MNEs, particularly digital companies, to the market jurisdictions where the consumers are located, even if these companies do not have a physical presence there.
• Pillar Two: It establishes a global minimum corporate tax rate of 15% aimed at preventing profit shifting and base erosion by companies that seek lower-tax jurisdictions.

2. What is India’s stance on the OECD tax deal?

India has raised concerns about the current OECD proposals, especially regarding Pillar One, which aims to redistribute tax rights. The key points of India's position include:

• India believes that the proposed rules under Pillar One do not adequately consider the interests of developing countries, favoring wealthier nations instead.
• It seeks better protection for its taxing rights, especially concerning large digital companies operating in India without a physical presence.
• India has implemented its own digital services taxes, such as the Equalisation Levy, on foreign digital companies due to the absence of a global consensus. The OECD deal would require India to abolish these taxes, which is seen as a loss of its sovereign power to legislate taxes.

3. Why is India opposed to the current OECD framework?

India's opposition to the OECD tax deal stems from several concerns:

• Unequal Revenue Distribution: Studies indicate that developed and high-income countries would benefit more financially from the deal compared to developing nations like India, which poses a significant concern given India's large consumer base.
• Loss of Digital Services Tax: India would need to eliminate its Equalisation Levy, a tax that currently generates substantial revenue from digital giants.
• Sovereignty Issues: The deal could limit India's sovereign ability to implement new tax laws and levies in the future, which is contrary to India's interests in controlling its taxation policies.

4. Why is India hesitant to support the OECD’s Multilateral Convention (MLC)?

The Multilateral Convention under Pillar One aims to set new rules for taxing MNEs in market jurisdictions. India is hesitant to sign the MLC due to:

• Insufficient Benefits: India is unsure if the revenues gained from the MLC will surpass the revenues it currently earns from its digital services tax.
• Potential Loss of Future Taxation Power: The MLC would prevent India from enacting similar digital taxes in the future, limiting its legislative freedom regarding tax matters.

5. What are the alternatives India is considering?

India is exploring several alternatives, including:

• Domestic Tax Reforms: Amendments to tax laws to account for digital presence, although international tax treaties can inhibit full implementation.
• Unilateral Measures: Continuing the Equalisation Levy, targeting earnings from foreign digital companies in advertising and e-commerce.
• United Nations-led Reform: Supporting a UN-led tax convention as a more equitable platform for non-developed nations, contrasting with the OECD's approach.

6. Why should India continue its firm stance on the global tax deal?

India must remain resolute in its opposition to the OECD tax deal for several reasons:

• Protecting Revenue: The current framework does not ensure sufficient compensation for India in exchange for relinquishing its digital services tax.
• Sovereign Rights: Agreeing to the deal would impede India’s ability to introduce new taxes in the future, compromising its sovereign taxation policies.
• Equity: The OECD deal appears to favor developed nations, leaving India and other developing countries with inadequate benefits.

Conclusion: Why India must dig in its heels

India's position on the OECD tax deal is driven by the necessity to safeguard its taxation rights and revenue in an increasingly digital economy. Until a more equitable solution emerges, potentially through UN intervention, India is justified in maintaining its opposition to ensure that its interests and those of other developing nations are adequately represented in global tax reforms.