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Tax Challenges Arising from the Digitalisation of the Economy

GS Paper 2

 Syllabus: Global Agreements involving India and/or affecting India’s interests

 

Source: OECD

 Context: 138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) – representing over 90% of global GDP – agreed to an Outcome Statement.

 

BEPS:

  • It refers to corporate tax planning strategies used by multinationals to shift profits from higher-tax jurisdictions to lower or no-tax jurisdictions.
  • The OECD defines BEPS strategies as exploiting gaps and mismatches in tax rules. It erodes the tax base (costing countries USD 100-240 billion in lost revenue annually) of the higher-tax jurisdictions.
  • As developing countries have a higher reliance on corporate income tax, they suffer from BEPS disproportionately.
  • Working together within the OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on –
    • The implementation of measures to tackle tax avoidance,
    • Improving the coherence of international tax rules and
    • Ensuring a more transparent tax environment.

 

The objective of the Outcome Statement: It delivered a package to further implement the Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.

 

Two‐Pillar Solution/ Global Anti-Base Erosion (GloBE) rules: These rules were agreed upon in 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS.

 

Significance of 2‐Pillar Solution:

  • It will define the multinational enterprises (MNEs) within the scope of the minimum tax.
  • It will set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis.
  • It will impose the top-up tax on a member of the MNE group in accordance with an agreed rule.
  • It will provide stability for the international tax system, making it fairer and work better in an increasingly digitalised and globalised world economy.

 

The Summary of the Outcome Statement:

  • A text of a Multilateral Convention (MLC) developed by the Inclusive Framework, which allows jurisdictions to reallocate and exercise a domestic taxing right over a portion of MNE residual profits.
  • A proposed framework for the simplified and streamlined application of the arm’s length principle.
  • The Subject-to-Tax Rule (STTR) together with its implementation framework, will enable developing countries to update bilateral tax treaties to “tax back” income.
  • A comprehensive action plan will be prepared by the OECD to support the swift and coordinated implementation of the Two-Pillar Solution.

 

About OECD:

●       It is an intergovernmental organisation with 38 Member countries, founded in 1961  (under the Rome Treaties of 1957) to stimulate economic progress and world trade.

●       It is a forum whose member countries describe themselves as committed to democracy and the market economy.

 

Insta Links:

Base Erosion and Profit Shifting

 

Prelims Links: UPSC 2016

The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of

 

  1. mining operation by multinational companies in resource-rich but backward areas
  2. curbing of tax evasion by multinational companies
  3. exploitation of genetic resources of a country by multinational companies
  4. lack of consideration of environmental costs in the planning and implementation of developmental projects

 

Ans: 2