Home / Media  / Quotes

Top-up tax rule to dent revenue gains from OECD Pillar 2 regime

The Central government may incorporate the OECD Pillar 2-GloBE rules in the country’s domestic law in the full Budget set to be presented in July, but it may not fetch India the anticipated revenue as envisaged earlier. This is because one specific provision, namely Qualified Domestic Minimum Top-up Tax (QDMTT), limits the country’s ability to benefit from the adoption of Pillar 2 tax package, say experts.
The Pillar 2-GloBE Rules – which introduce a global minimum tax for multinational enterprises (MNEs) – aims to deter profit shifting by ensuring that these MNEs maintain a minimum Effective Tax Rate (ETR) of 15% across all jurisdictions in which they operate. MNEs, as per the rules, are defined as those entities with a global turnover exceeding 750 million euros.
The 15% global minimum tax rule enables countries to impose a ‘top-up tax’ on either the intermediate parent entity (IPE) or the ultimate parent entity (UPE) of a company that artificially reports profits in a low-tax jurisdiction.
Consider for instance, an MNE group headquartered in India, pays corporate tax at a rate of 9% in UAE through its subsidiary. This would mean the remaining 6%, it will have to pay as top-up tax. This top-up tax may either be paid to India or to UAE, depending on whether the low tax jurisdiction (in this case UAE) has introduced QDMTT or not. In case, QDMTT is not invoked, India will have the right to collect the extra 6%.
But, in reality, India is unlikely to get any extra revenue as jurisdictions are likely to incorporate the global minimum tax rate into their domestic laws and collect taxes from entities located within their jurisdiction under the QDMTT mechanism only, say experts.
“Adoption of QDMTT in the jurisdiction where the IPE (intermediate parent entity) is situated would preclude the collection of the top up tax in the jurisdiction where the UPE (ultimate parent entity) is situated. Under this situation if the UPE is in India, collection of additional tax may not occur,” says Rohinton Sidhwa, partner, Deloitte India.
In the example stated above, UAE has the primary responsibility to collect this top up tax by implementing QDMTT within its domestic tax law. In the absence of QDMTT, the right to collect this top up tax will flow to India where the UPE is located through an income-inclusion rule (IIR) if India adopts the GloBE rules.
If India as UPE fails to implement an IIR, the right to collect the top up tax will extend to some other jurisdictions (who have adopted GloBE rules) where the MNE operates, through an Undertaxed Payments Rule (UTPR). The QDMTT comes first in order of how top up taxes are collected.
The UAE has a corporate tax rate of 9% where taxable income is more than AED 375,000. Free zones in UAE can get 0% corporate tax subject to the fulfilment of the conditions. Other countries where the tax rate is less than 15% or having no tax include Bahrain (nil corporate tax) at present, British Virgin Islands, Ireland, Bermuda, Mauritius.
Since January 1, 2024, over 27 countries (of 130 that signed the convention) have incorporated GloBE rules in their domestic laws. Indian headquartered MNE groups – having presence in several such jurisdictions – will have to provide for top-up tax in the books of account, if applicable, in their financial statements for the year ended 31st March 2024, a recent report by Deloitte said. The MNEs are required to comply with GloBE rules even if India has not yet implemented them.
“India is adopting a wait and watch approach for adoption of the Pillar 2 law in the Income-tax Act. Indian MNEs will however have to analyse the impact of Pillar 2 and other related developments around the world on its business and taxes and be implementation ready,” said the Deloitte report.
Yeeshu Sehgal, Head of Tax Market, AKM Global, says India can take advantage of Pillar 2 to ensure that it can effectively tax profits generated by its multinational companies’ subsidiaries located in jurisdictions with tax rates below 15% which will not implement QDMTT. “India can incorporate GloBE rules into its domestic tax legislation to address concerns related to profit shifting and base erosion,” he says.
Please click here to view the full story on Financial Express.