Contemporary Trends in International Taxation
Leading tax litigators as well as senior Government officials discuss Budget 2023, emerging trends in tax disputes, and approaches to dispute resolution.
A lot of support from developing nations
Adv. Mukesh Butani, Chairman, IFA India
The big news in our country is India’s G20 Presidency. It is taking role in shaping international tax reforms. India is at the center stage with a strong stance with the international community, insofar as its support for the two-pillar discussion is concerned. India is one of the foremost countries which embarked in taxing the digital economy. For the first time, the world heard about a virtual permanent establishment and that happened to be India. We are now displaying our ability to adapt to the advancing economy. At the same time, India has expressed its willingness to move ahead with cooperation and dialogue. India’s G20 Presidency theme is well expressed with the Sanskrit term Vasudhaiva Kutumbakam, which means one earth, one family, one future and that’s really the goal.
G20 Objectives on Taxation
On the 24th and 25th of February, the finance ministers and the heads of central bank governors of the G20 met in Bengaluru and committed to enhancing international tax policy and steering the global economy towards a strong, sustainable, balanced and inclusive growth. The summary of the G20 summit, which concluded just less than a year back include:
- commitment to swift implementation of two pillar solution
- urging the OECD to finalize the pillar one, such that the multilateral convention can be signed in the first half of 2023
- welcoming the release of global implementation framework, which facilitates the implementation of its rules and common approach
- welcoming the steps taken by countries to implement the global rules and call upon the inclusive framework for finalization of negotiation on what is popularly called STTR
- recognizing the need for coordinated efforts towards capacity building to implement two pillar international packages. This is very relevant for countries in the African subcontinent.
- calling upon the OECD to conclude the work on the implementation packages with regard to cryptocurrency and crypto assets regulatory framework.
Despite consistency in commitments, we also heard the French finance minister raising concerns on the implementation of pillar one, specifically picking on the United States, Saudi Arabia and India and blaming them for blocking the discussions. We will see in the next few days, what he actually meant.
Status of Pillar 1 and 2
The concerns raised by digital companies on pillar one, are important. They have voiced that the levies are discriminatory in nature. This also relates back to the action that was taken by the United States Trade Commissioner, with regard to what is popularly called A301 proceedings, lacking an effective mechanism for avoidance of double taxation, and providing a timely and efficient process to determine whether a particular transaction is liable or not for such unilateral levies. So that sums up the concerns on pillar one so far.
On pillar two, which is the global minimum tax, we have seen a rush of activities by various jurisdictions. To name a few, Hong Kong as late as last week presented its 23-24 budget to the Legislative Council, implementing the minimum tax of 15% on the pillar 2. Singapore, just a fortnight ago, presented the budget and confirmed not just its intent to implement the minimum top up tax, but also looked at large multinationals with annual revenues of 750 million—which is also the threshold for pillar two—who are operating in Singapore, and look at effectively commencing its measures from January 1, 2025. United Kingdom, on the other hand, introduced the income inclusion rule, which will apply to large UK headquartered multinational groups, which will force them to pay the top up tax, where their foreign operations have an effective tax rate of less than 15%.
IMF Pitches In
IMF, which is seen as a dormant player focusing only on policy, last month released a report on what they call as the international corporate tax reform. Some of the findings of the IMF are very revealing. It does acknowledge that the international tax system ought to be more robust to deal with tax spillovers, and it should be better equipped for digitalization and also modestly raise the corporate tax revenues.
IMF expects that pillar one would reallocate at least 2% of the total profits of multinational enterprises, mainly from low tax investment hubs, to other countries and raise the global corporate tax rate revenues by $12 billion. It also expects that the pillar two will raise the global corporate tax revenues by 5.7%. As it stands today, it further says that multinational investments may decline modestly in the face of enhancement in the effective tax rates. However, it expects that the effective tax rates would rise from the direct effect of the global rules. From a medium to long term perspective, the tax revenues will be reduced from a competitiveness standpoint, and there will be reduced scope for profit shifting. More importantly, IMF also said that the cross-border tax avoidance will reduce substantially with the implementation of these measures.
Relevance of the UN
The United Nations is not very far away. It is also looking at these changes in the landscape from emerging markets and developing markets standpoint. On 23rd of November 2020, it approved a resolution to adopt the new International Cooperation Framework. The resolution was advanced by representatives from Nigeria on behalf of UN members of the group of African states. The rationale of the move to develop a new cooperative framework within the United Nations is merely to be able to strengthen the International Tax cooperation and make it more inclusive and more effective. It explains the relevance of United Nations in this changing landscape.
We should also table the concerns expressed by others. The European Union has stated that the OECD G20 Inclusive Framework, which puts together 141 jurisdictions and is committed to multilateral solution, is creating a new parallel track of discussion and is really not the right answer. The United States, on the other hand, disagrees with the resolution’s implication, and there is not presently a highly inclusive forum working to strengthen international cooperation on tax. They stated that the wording of the draft resolution will tear down the process under the OECD G20 Framework.
Support & Respect for India
There is a lot of support from developing nations. A case in point is the views expressed by the representative of Nigeria: they said that most countries find it difficult to accept the legitimacy of international norms; and that they have no effective voice in shaping the global framework. Similarly, on the Indian side, we are experiencing a lot of changes, particularly on evolving jurisprudence surrounding international tax.
We saw the Indian Supreme Court in early 2021, highlighting a very important international tax principle, which is also articulated in what we popularly called Article 31 of the Vienna Convention on Law of treaties, which is that the treaties should be interpreted in good faith. This landmark decision, besides looking at the issues that were confronting the software industry, did make some very important observations, which tend to make the world look towards India with phenomenal respect for its judicial system. It affirmed the primacy of treaty law over domestic law. It emphasized on the principle of liberal interpretation of treaties. It also looked at government’s attempt to override treaty obligation by way of unilateral retrospective amendment overruled. It also looked at the importance of OECD commentary, despite reservations made by policymakers. These important principles and aspects of judiciary make us truly a proud nation. The budget proposals of 2023 are an important direction by the Indian finance minister to maintain the continuity and stability of Indian taxation to simplify and rationalize the provisions, and more importantly, reduce the compliance burden with a view to promoting an entrepreneurial spirit and provide relief to small, marginalized taxpayers.
India is now the third largest ecosystem for startups and rightly so. The government extended the tax benefits for eligible firms to March 31, 2024. It also looked at carrying forward a set of provisions, again in the context of relaxation to startups, and the deduction of 100% of profits with respect to 10 consecutive years from the date of incorporation. It has now been extended from startups, which were incorporated after April 2016 to April 2023. That date has been extended by one more year.
On Dispute Resolution, we all await the reduction in dependency of appeals and hopefully with 100 joint commissioners now at the disposal of the dispute resolution mechanism, we hope that many of the disputes will be cleared out.
Finally, I’d like to talk about the role of IFA in shaping the International Tax framework. It clearly plays a very pivotal role. It is a not-for-profit organization. It doesn’t lobby or do any advocacy by the governments. Instead, governments invite IFA to share their research and their independent view. And hence, the objective is clearly studying the advancement of international and comparative law in regard to public finance, and in particular, to international tax and competitive fiscal system.
India has become more effective to the outside world
Mr. K Gopala Desikan, CFO, TVS Motor Company
I started my career as a tax man. I was more seen in the corridors of the department the early 90s attending hearings, following up for various issues and referring to tax magazines. Then I moved to the factory side in TVS Motor almost 10 years back, in Chennai. So, tax is my favourite topic.
Where are we now as a country? What is being looked at going forward? What is the outlook? What is the relevance of the outlook to international taxation? Let me try to put this in three buckets:
- Where are we on FDI today?
- How our GDP has grown over a period of time?
- Where are we in the digitalization front?
Since 1947, we have received $950 billion; $500 billion we received in the last 90 months. FDA reflects the trust, the consistency in our policy, the consistency in our approach, the economic, social and political front stability. It’s a very important parameter to judge where as a country we are going. This $500 billion was received from 162 countries and across 61 sectors. Again, it is not received in seven cities of this country. We have received in 31 states and union territories of our country. It reflects the breadth and depth of the confidence the outside world has on India.
Another aspect of FDI is that post-pandemic, India has become more effective to the outside world. We are regarded as the factory of the world. India is going to be the manufacturing hub going forward. Many things are getting diverted from Europe and China to India. We have the capability, the manufacturing skills and huge skilled labor in this country. Therefore, the future is going to be for us. Again, India is regarded by the world as a service provider. Export, which is around 2% of the world’s overall exports, today is expected to go up by 4% by 2030.
We are at $3.5 trillion today. The first trillion took 67 years; the second trillion, eight years; and the third, five. Our target: by 2030, $7 trillion. Out of the average working population, by 2030, according to a UN report, 24% of the incremental people required for employment globally, will be supplied by India. It is a very important statistic. It means more employment opportunities, more income, more investments, more spending and more economic activities. Therefore, the outlook on GDP is very bright.
Digitization in this country is an unprecedented one—both by the pace and the depth at which we are proceeding. We can see all this in the government offices, on land registration and the way documents, payments and investments are handled.
These are quite relevant for our exposure on international taxation. More inflows are expected, the market capitalization is expected to go up and more domestic investments are going to happen. This is just the beginning. Earlier, we were exporting to a few countries. Today we are exporting to more than 80 countries. Those days, in handling tax, I would refer to a couple of sections. Today, we handle transfer pricing and a lot of cross border transactions. A lot of consolidation is expected to happen.
One good thing that has happened is the Delhi High Court’s decision on tax residency. They have given a clear and fool-proof indication for determining the residential status. We also look for a Supreme Court decision on dispute resolution on dividend taxation. Nobody is now looking for a tax haven. With global taxation aligning to 15%, India is also moving towards that. As business people, we only look for consistency, stability and certainty on the tax front.