India Is Taking a Cautiously Optimistic Approach to Pillar Two

As part of the OECD Inclusive Framework on base erosion and profit shifting, India is committed to a consensus-based solution for implementing Pillar Two, comprising global anti-base erosion, or GloBE, rules and the subject to tax rule.

Unlike some other jurisdictions, India still has to take steps domestically to implement Pillar Two.

To understand India’s perspective on Pillar Two, it is necessary to consider the current corporate tax regime. India offers taxation of corporate income at different rates varying from 15% to 30% (plus applicable surcharge and cess), subject to certain deductions and exemptions. Separately, an entity is also under an obligation to pay minimum alternate tax at the rate of 15% (plus applicable surcharge and cess), calculated on the basis of book profits of the entity, if under the normal tax provision the tax payable is less than MAT.

Given the above, it appears that there should be no tangible impact by the GloBE Rules on the income of constituent entities located in India, as the effective tax rate applicable in the case of Indian entities is already more than the agreed minimum rate of 15% under the GloBE Rules. One aspect of the MAT regime that may make the GloBE rules relevant for Indian constituent entities is the variance with the GloBE Rules in computing tax under domestic MAT provisions. India may have to address this issue by amending its domestic tax laws.

From a Pillar Two perspective, another area of concern could be the tax incentives provided under domestic tax laws, especially to boost manufacturing activities, export, and investment flow in India. India, being a developing economy, offers several tax benefits by forgoing its taxing rights to attract investment. It remains to be seen to what extent India will carry out changes in these incentive schemes to align them with the GloBE rules.

It will also be interesting to see how Indian tax policymakers will align their tax incentive schemes with the STTR. As an example, in certain cases, India grants exemption from payment of tax on incomes such as dividend and interest.

At a policy level, India has pushed for a fair allocation of revenue to market jurisdictions primarily comprised of developing economies to safeguard their tax revenue, a principle that is at the core of Pillar Two. It is expected that India would implement qualified domestic minimum top-up tax rules that will ensure that the income of an Indian constituent entity from its economic activities in India would be taxed in India only, and any taxing right wouldn’t be surrendered to the resident jurisdiction of the ultimate parent entity.

In addition, a particular area of interest for India will be implementation of the STTR, which may result in potential gains in terms of tax revenue for market jurisdictions like India. However, the challenge with the STTR will be its implementation through bilateral tax treaties, which could mean renegotiation of treaties, usually a long-drawn-out process and not necessarily a level playing field from the perspective of developing countries.

Accordingly, the tangible benefit of the STTR may only be realized if India is able to negotiate reasonably well, keeping in mind its objective of fair allocation of revenue to market jurisdictions.

In view of India’s overlapping interests as a market jurisdiction and an emerging economy, it continues to remain an important pivot for global tax reforms. India’s tax policy approach continues to be optimistic toward GloBE Rules but also cautious to safeguard its interest in terms of tax revenue.

Given the above, any legislative action to implement Pillar Two remains on hold before clarity emerges about the clear benefits that are likely to accrue. From that perspective, India wouldn’t just be looking at Pillar Two but also Pillar One as a package deal.

There is also a possibility that if the two-pillar solution doesn’t align with India’s policy objective of fair allocation of tax revenue, India may want to leverage the initiatives undertaken by the United Nations. In its latest report, the UN has identified three options to promote tax cooperation among members of the international community to make it more inclusive and to address issues relating to tax evasion and aggressive tax planning:

• A multilateral convention on tax
• A framework convention on international tax cooperation
• A framework for international tax cooperation

As stated in the UN report, the proposed options would help address dissatisfaction among members with regard to the inefficiency of the current tax treaties in fair allocation of taxing rights, especially to market jurisdictions.

Additionally, the UN report takes a view that implementing Pillar Two can be a challenge from a practical perspective, as countries may implement it in different ways, resulting in a compliance burden.

There is also concern that Pillar Two impinges on the tax sovereignty of countries by limiting their ability to use tax as a tool to attract investment.

While the UN initiative is a step in the right direction for democratizing global tax reforms, it also contains the risk of delaying full implementation of the two-pillar solution, since at a broader level the initiative aims to reset the agenda for the reforms.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aditya Singh Chandel is a partner and Sarvagya Bilgaiyan is an associate with AZB & Partners.

We’d love to hear your smart, original take: Write for us.