Indian multinationals with a presence in 18 European Union nations, the UK, Vietnam and South Korea will be subject to a 15% global minimum tax rule after they implemented rules for the tax reform, experts said.
Some 130 countries, including India, have signed off on the global tax reform. But the countries mentioned above have implemented domestic rules, which are effective from 1 January 2024 or later.
In an analysis shared exclusively with Mint, Deloitte said that given the implementation of the Global Anti-Base Erosion (GloBE) rules in these countries from 1 January, Indian headquartered multinational business groups with a presence there will be required to comply with the GloBE rules even if New Delhi is yet to implement it.
Accordingly, Indian multinational groups will have to provide for top-up tax, if applicable, in their financial statements for the year ended 31 March 2024, Deloitte said in its analysis.
Eighteen of the EU's 27 nations have put in place domestic laws for the global minimum tax as per a EU directive, Deloitte said.
The 15% global minimum tax rule–agreed to by the 130 countries in 2021 to prevent tax avoidance by multinationals—allows them to levy a ‘top-up tax’ on the intermediate holding company or the ultimate parent of an entity which artificially shows profits in a low-tax jurisdiction.
The global minimum tax regime is also referred to as pillar two of the drive against tax avoidance.
The top-up tax is the difference between the globally agreed minimum tax rate of 15% and the effective tax rate (ETR) the entity in the low-tax jurisdiction is subject to. If the low-tax country does not neutralise its tax advantage by introducing what is called a Qualified Domestic Minimum Top-up Tax (QDMTT), the intermediate holding company or the ultimate parent in other jurisdictions will be subject to a top up tax.
Even in cases where the intermediate holding company or the ultimate parent is in a low-tax jurisdiction, the global tax deal allows a way of neutralizing the tax advantage by subjecting group entities in countries with above 15% tax rates to additional tax.
The consequences of failure to pay up the new tax "would be a top-up tax in the jurisdiction applicable," explained Rohinton Sidhwa, partner, Deloitte India.
“Ideally most headquarter jurisdictions would impose the top-up tax but under some circumstances it could be other jurisdictions that the multinational enterprise operates in, or alternatively, the tax jurisdiction where the income arises could impose a Qualified Domestic Minimum Top-Up Tax (QDMTT)," said Sidhwa.
Companies reviewing operating structures
Most businesses are reviewing their operating structures and are evaluating if top up taxes apply and if they do, how to minimize the impact on global effective tax rate or ETR, he added.
For India, many experts expect that the Central Board of Direct Taxes (CBDT) to come out with legislative amendments to the Income Tax Act to implement the global minimum tax regime and to levy any top up tax it needs to.
An email sent to the spokesperson for the finance ministry and to CBDT on Thursday seeking comments for the story remained unanswered at the time of publishing. The government will be coming out with a Finance Bill as part of the full budget for FY25 in July as the interim budget did not have a Finance Bill.
Amit Maheshwari, tax partner at tax and consulting firm AKM Global said Indian headquartered groups with subsidiaries in low tax jurisdictions, especially those which have already announced implementation of the 15% global minimum tax regime, should evaluate its impact while preparing consolidated group financials.
“Also, these companies need to analyse their existing transfer pricing arrangements and supply chains," said Maheshwari. Transfer pricing refers to the valuation of multinational firms’ intra-group transactions across different countries that have a bearing how income is recognized in these countries.
Maheshwari said Indian subsidiaries of overseas headquartered groups will not have much impact of pillar two since the effective tax rates in India (including newly setup manufacturing business) are already more than the minimum 15% prescribed by pillar two.
“Notably, companies whose effective tax rate is lower than 15% due to tax incentives or profit linked deductions, may have to evaluate the impact of Pillar 2, when implemented," said Maheshwari.
“We are on the cusp of a new era in international taxation," Deloitte said in its analysis, adding that independent of when and how India implements the GloBE rules, Indian multinational groups will have to comply with this regime in the jurisdictions where they operate.
“It is imperative that multinational enterprise groups understand how to navigate the pillar two framework and are implementation ready," the analysis said.