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MNC Digital companies may face a minimum level of tax, Retail News, ET Retail

NEW DELHI: Multinational technology and digital companies may have to cough up a minimum level of corporate tax, bringing an end to the popular practice of lowering or avoiding taxes by setting up entities in low-tax jurisdictions.

The Organisation for Economic Cooperation and Development (OECD) on Friday unveiled for public consultation a proposal on taxation of digital companies. It seeks to use financial accounts as a starting point for determining the tax base and provide guidance on the extent to which an MNC can combine income and taxes from different sources in determining the effective tax rate on such income.

Experts say this plan could radically change the tax landscape globally as it deals with the issue of multinationals setting up intermediary operations in a low-tax jurisdiction before they set up base in any country to reduce the tax outgo.

“The OECD’s Pillar Two, or Global Anti-Base Erosion Proposal (GloBE), proposals could lead to significant changes to the overall international tax rules under which multinational businesses currently operate,” said Rajendra Nayak, tax partner & national leader-international tax services, at EY India.

The scope of the GloBE proposals is not limited to highly digitalised businesses, Nayak said, adding that these would, through changes to domestic law and tax treaties, provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of taxation. “The proposals are intended to advance a multilateral framework that achieves a balanced outcome, limiting the distortive impact of direct taxes on investment and business location decisions,” he said.

An entity-blending approach, proposed in the document, would require a multinational enterprise to determine the income and taxes of each entity in the group as well as the income of domestic entities that was attributable to a foreign branch and be subject to tax under the GLoBE proposal where the effective tax rate of a foreign entity (or foreign branch) was below the minimum rate.

This is the second part of the proposal on digital taxation, called Pillar Two. The first part, or Pillar One, was released in October.

“Pursuant to receipt of proposals from the stakeholders, we can expect the OECD to issue the final consensus-based solution to tax this new version of world economy,” Nangia Andersen Consulting chairman Rakesh Nangia said.

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