In the year 2021, India along with other 136 nations agreed to the two-pillar solution which is likely to be implemented by the year 2023. The two-pillar framework was proposed and implemented in order to address the tax challenges arising from the digitalization and globalization of the economy. In order to take it ahead for effective implementation, The two pillar model rules provide the government’s a proper framework to take ahead the two pillar solution.
Need for OECD Two Pillar Framework:
The rapid level of expansive digital transformation left a deep economic and societal impact resulting in significant changes. In the present digital world there are three important factors that need to be considered:
- Scale without mass
- More reliance on the intangible assets
- Privacy and centrality of the data
These factors pose various challenges while designing and implementing the global tax system. Henceforth, the OECD two-pillar framework provided a revolutionized tax implementation regime by accounting for the proper profit allocation and nexus rules to distribute the taxing rights on the income generated from cross-border activities and by the cross-border operating entities.
The present business environment requires such sort of an international tax regime that is suitable for all sorts of countries whether it is developed, developing, or underdeveloped.
The Organization for Economic Co-operation and Development (OECD) is an organization that works with governments to build policies, stepped in to bring the tax digital services uniformity in the world, and provided for:
- Making sure that the MNCs pay a minimum tax of 15% (fifteen percent) irrespective of their home base.
- Levy of taxes on the MNCs which have global sales of over EUR 20 bn and profitability of 10% (ten percent)
If such a framework is implemented then the countries such as the Netherlands, and Luxembourg which offers lower rate of taxes and other tax havens would surely be affected.
It was in the year 2016 when India imposed an equalization levy of 6% on online advertisement services which are provided by non-residents. Such a scheme of equalization levy was applicable to the huge giant companies such as Google, and various other foreign online advertising services providers.
Provided that, further in the year 2020, the scope of such an equalization scheme was widened and expanded where a 2% of equalization levy was imposed upon all digital transactions by foreign entities which are operating in India or which have access to the Indian local market.
The OECD’s framework allows India to tax digital companies like Microsoft, Google, Facebook, and Netflix and various other companies falling under the ambit of the equalization levy such as Alibaba, Uber, LinkedIn, Spotify, e-Bay, etc which ultimately will protect India from the retaliatory tariffs.
Steps Taken for Implementation:
The OECD, to ensure that the new rules can be implemented and administered efficiently and effectively, has provided capacity-building support to the developing countries on this work. Such work shall be carried out in partnership with regional organizations and development banks, as well as through extensive technical assistance programs.
It is to be noted that the OECD framework will provide for effective and uniform International taxation and at the same time this deal is intended to ensure that large multinational digital entities pay the more amount of taxes in those specific countries where they have customers and users no matter from where they operate physically.
Need help on Cross border tax norms?
Write us at email@example.com