A COMPREHENSIVE GUIDE - IS TAX AVOIDANCE ILLEGAL NOW?

International collaboration to end tax avoidance

Gone are the days? When a MNE incorporated in a Country, while its POEM is in a tax heaven, its production is in another jurisdiction and customers are located in some other jurisdiction, can avoid tax on income to a great extent. Whether Tax Avoidance Illegal Now? Digitalization brings further complexities with value creation in one jurisdiction but potentially with no nexus for taxation under century old international tax regime.

OECD/G20 Inclusive Framework on BEPS, 140 tax jurisdictions are under International collaboration to end tax avoidance strategies that exploit gaps and mismatches in tax laws and tax Treaties to avoid paying tax estimated to $240 billion every year. There are innumerable international tax avoidance mechanism are being used by MNEs for the last many years. Here are some of the path breaking decisions to deal with Tax Challenges Arising from the Digitalisation of the Economy:

• Developed world for the first time acknowledges that Country of Market should get its due share of tax revenue from MNEs whose earnings would not be possible if market was not available.
• New rule for permanent establishment shall be workout along with the century old international tax framework.
• No bifurcation is made between goods or services and digital or virtual working.
• Thresholds are being identified based on top line and bottom line of MNEs against the easier solutions based on top line only.
• As per Pillar one:

(i)     To start with MNEs with global turnover above 20 billion euros and profitability above 10% (profit before tax/revenue) will be in Scope Companies.

(ii)    Turnover threshold will be reduced to 10 billion euros on review of successful implication of the first stage after 7 years from the first agreement comes into force.

(iii)   Extractives and regulated financial services are excluded.

(iv)    New special purpose income nexus rule permitting allocation of taxing right to market jurisdictions, where in scope MNEs group drives at least 1 million in revenue from that jurisdictions (for smaller jurisdictions nexus will be set at 250000 euros), shall be developed to determine whether the jurisdiction qualify for allocation.

(v)     Quantum of profit allocable of in scope MNEs shall be, between 20% to 30% of residual profit defined as profile in excess of 10% of revenue will be allocated to market jurisdictions where goods or services are used or consumed with nexus using a revenue based allocation key after many other adjustments.

• Target for the implementation of New International tax rule is being fixed by the end 2022 with a commitment to abolition of all unilateral measures like digital services tax and other similar measures.
• Pillar two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.

After years of intense work and negotiations, it is expected that MNEs will pay their fair share of tax to every jurisdictions including market jurisdictions. The implementation time frame is being fixed, let us see whether the efforts made under OECD/G20 Inclusive Framework on BEPS will strengthen international tax rule and test the saying Tax Avoidance Illegal Now? Accordingly the withholding tax obligation under Section-195 of Income Tax Act has undergone complete change.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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