MNCs in India fret as US yet to ratify global tax deal

Large multinational corporations operating in India - particularly digital majors - conducting global tax impact assessments, are anxiously awaiting clarity as US ratification of the OECD tax deal appears unlikely due to a deadlock in the US Senate, with the self-imposed deadline for agreeing to the Multilateral Convention (MLC) for Pillar 1 (P1) expiring on June 30.

Tax experts say the international tax treaty, which Republicans strongly oppose and requires a two-thirds majority in the US Senate to pass, faces significant challenges. Without US ratification, meeting the OECD tax deal's implementation conditions to reshape the global tax system becomes extremely difficult.

The international tax treaty's implementation needs acceptance by 30 jurisdictions and the inclusion of the headquarters jurisdictions of at least 60% of the most profitable multinationals; given that many of these businesses are located in the United States, US participation is critical to attaining this level.

If the United States does not ratify the deal, India's present unilateral charges, such as the equalisation levy, will remain unaltered as the government continues to wait and see.

"The final text of the MLC on Amount A was expected by this month's end, but appears to be held up. It also appears that even if the US treasury agrees to sign the MLC, it might not be ratified by the US Senate soon, meaning the MLC may not enter into force. In that case we could see the continuation of the Equalisation Levy in India," said Sanjay Tolia, partner, Price Waterhouse & Co. LLP.

Naveen Aggarwal, Partner-Tax, KPMG in India, said that Pillar 1 and unilateral levies such as India's Equalisation Levy cannot coexist. "An important requirement of the MLC is the removal of standalone Digital Services Taxes (DSTs). So, countries like India, which have implemented standalone DSTs, will need to remove them before gaining the right to allocate profits under Amount A," he said.

According to sources with direct knowledge of the situation, India is actively contributing to the final wording of the Multilateral Convention (MLC) to implement Amount A of Pillar 1 and should be ready to sign it.

Pillar 1 is made up of two parts: Amount A, which redistributes $200 billion in multinational earnings based on client location, and Amount B, which creates a new method of splitting income for ordinary marketing and wholesale distribution activities.

People with direct knowledge of the matter say that the US and India differ on the implementation of Amount B.


"The US has stated that it will sign the agreement only if India accepts its view on making Amount B mandatory, which India has already rejected. Even if the US signs the MLC, it is highly unlikely that the US Senate will ratify it, meaning the MLC will not come into force. India maintains that it agrees with Amount A but will continue with the Equalisation Levy if the MLC fails to be implemented," said a tax expert on conditions of anonymity.

Tax experts say that it's difficult for us to predict the way forward because, at this point, they don't know what India will gain from Amount A as no calculations have been done.

"The final impact of Amount A under Pillar 1 will depend on whether the MLC is signed or ratified. Only then will we know what the government's approach will be towards removing the Digital Services Taxes (DSTs)," said Aggarwal.

According to people tracking the development, Pillar 2 is moving rapidly, with more than 40 countries in different phases of implementing it by 2024.

The OECD's Pillar 2 framework seeks to ensure that multinational businesses (MNEs) with global revenues of more than $750 million pay a minimum tax rate on income in each country in which they operate. India, the United States, and China are among the major economies that have yet to make a public pronouncement on the matter.

While some sources suggest that the United States may not pass Pillar 2 legislation anytime soon, analysts believe this will have little impact on India's plans to implement Pillar 2.

"The way Pillar 2 works is that even if one country in the multinational group legislates it, that country can collect the shortfall in taxes. Therefore, India might not wish to lag behind in the implementation process. Taxpayers would expect an announcement on India's roadmap for implementing Pillar 2 in the forthcoming budget," said Tolia.

According to tax experts, Pilar 2 will most likely be implemented later and over time. They stated that the government must first define its intent to implement the Global Anti-Base Erosion (GloBE) standards.