Global minimum tax: Will India’s Budget offer a Pillar Two roadmap?

The global corporate tax landscape shifts as Pillar Two’s Global Minimum Tax aims to curb profit-shifting among MNEs.

The corporate tax landscape is undergoing a seismic shift, globally, with the advent of the Global Minimum Tax, also known as Pillar Two. By 2024, this initiative had been adopted by 30-plus countries, signalling the most significant reform of international tax regulations in a century. 

Prepared under the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework, which encompasses over 140 countries, Pillar Two is poised to redefine the fiscal obligations of multinational enterprises (MNEs).

Pillar Two aims to curb profit-shifting and ensures that MNEs pay a minimum level of tax in all the countries where they operate. It applies to MNEs with global revenues above €750 million annually and they must pay a minimum effective tax rate (ETR) of 15% on a country-by-country basis.

How does it work? The mechanics of Pillar Two are transformative. Should an MNE’s ETR fall below 15% in any given country, a supplementary top-up tax is levied to make up the difference. This top-up tax is payable to the nation where the MNE’s parent company is brd.

For instance, an Indian MNE with subsidiaries in the UAE and Germany that has an ETR of 9% in the former country and 30% in the latter would be subject to a 6% top-up tax in India for the shortfall in the UAE. However, the UAE will have the first right to collect this tax if it enacts a compatible domestic minimum tax. 

If neither India nor the UAE enacts Pillar Two, Germany would be able to collect the UAE shortfall through a backstop rule known as the under-taxed profit rule (UTPR), which is set to take effect in several countries from 2025.

Pillar Two has been designed in such a way that if even one country legislates it, the entire top-up tax could be collected by that country. Therefore, no country, including India, would like to be left behind in the implementation process.

Implementation is picking up steam: Pillar Two implementation is gaining momentum, with 50-plus countries at various stages of rolling it out. European countries such as the UK, Switzerland, Belgium, the Netherlands, France, Germany and Ireland, along with countries like Australia, Korea, Japan and Canada, have already implemented Pillar Two, starting this year. 

Singapore and Hong Kong have announced that they would roll it out in 2025, while the UAE has initiated consultations for its implementation.

The impact on MNEs: All impacted businesses should assess the impact of Pillar Two on their current and prospective transactions. Pillar Two analysis and compliance require extensive accounting and tax data, a lot of which may not be readily accessible. 

MNEs must, therefore, assess their system-readiness to accommodate the analytical, compliance and reporting requirements of this new tax regime. Given the phased manner of its implementation across different jurisdictions, MNEs would also need to navigate a mosaic of local regulations.

Most Indian MNEs have either initiated or completed preliminary impact assessments. They are now in the process of preparing for ongoing compliance and tax provisioning in case of an ETR shortfall in a low-tax country.

Pillar Two impacts the corporate race to stay competitive: The new global tax regime will impact existing tax incentives and tax-holiday schemes across the globe, as a low ETR on account of such incentives will result in a top-up tax liability. 

Therefore, several countries are re-designing their tax incentive programmes for their businesses to remain competitive in the post-Pillar Two world.

Incentive schemes are being revised not just to be Pillar Two-compliant, but in such a way that they serve as encouragement only for substantive business activities (those which are deemed important, i.e.) and affect the ETR only to a limited extent. 

MNEs, therefore, would now need to take into account changes in tax-incentive structures as they re-assess their ongoing and proposed investments.

India’s Union budget could lay out a roadmap for Pillar Two: We are just a few days away from the first full budget of the Modi 3.0 government. Anticipation is high among MNEs and tax professionals alike of a roadmap for India’s approach to Pillar Two taxation.

Given the complexity of Pillar Two rules and the impact it will have, it is advisable that India’s introduction of the regime is preceded by consultations with various stakeholders. Such consultations should focus on the interaction of Pillar Two with India’s extant tax system. Its implications for tax incentives for GIFT City in Gujarat may also need to be discussed.

The implementation of Pillar Two by a growing number of countries amounts to a collective stride being taken towards tax fairness across the planet. Remarkably for a world that has seen many waves of business globalization, this is the first ever tax system that’s truly global. It would require MNEs to shift mindsets even as they adopt new technologies and ways of doing things.

With the first full budget of the newly sworn-in government due on Tuesday, we are waiting to see how exactly India plans to embrace this global tax reform.

It is not a matter of if, but when. The countdown has clearly begun.

This article was originally published on LiveMint news website. Jitendra Jain, a partner at Price Waterhouse & Co LLP, contributed to this article.

Views are personal and do not represent the stand of this publication.