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