Global Minimum Tax,Base Erosion and Profit Shifting (BEPS),2 pillar approach in BEPS, INDIA AND BEPS, Digital Tax /GOOGLE TAX OR EQUALISATION TAX:

MNC's across the world are using multiple loopholes in the existing taxation laws of different countries  to evade taxes or paying of less taxes .Governments across the world are concerned about this trend and are aggressively trying to deal with this menace. Global Minimum Tax and Base erosion and profit shifting (BEPS) are such arrangements 

BACKGROUND OF BEPS:

• Large MNC’s have traditionally paid taxes in their home countries or in Tax Havens even though they did most of their business in foreign countries. 
• The countries of consumer base where these MNC’s carry out their business are at loss. 
• Corporate tax rates throughout the world are dropping over the last few decades as a result of competition between governments to promote private investments. 
• Global corporate tax rates have fallen from over 40% in the 1980s to under 25% in 2020 and even to the level of zero in tax havens ending up to “race to the bottom”.

In view of the above,it is evident that countries where MNC's carry out their operations are losing their revenues.To deal with this situations, efforts are undertaken at international level to root out this menace.

Global Minimum Tax: 

• The Global Minimum Tax is designed to tackle the problem of tax losses to the countries affected by profit shifting. 
• Various methods are adopted under the guise of Global Minimum Tax:
• Profit shifting by companies is reduced boosting the government revenue and reducing the wasteful use of resources for tax planning.
• Tax payments are increased from firms that shift profits to low-tax environments from the country of their origin.
• The focus is on reducing the international tax competition amongst the countries to reduce the taxation on MNC's so that countries are motivated to tax multinational profits at higher rates.

Base Erosion in BEPS:

• Company needs to pay tax for the incomes or profits they earn.
• MNCs used sophisticated tax planning practices to avoid tax payments by shifting their incomes to other countries, especially to tax havens (via shell companies) or deducting large interest payments, overhead expenses.
• These practices of shifting the companies to tax Havens erodes the tax base ie the income which is the basis of taxes to be paid, is said to be Base Erosion.

Profit Shifting in Base erosion and profit shifting (BEPS) :

• Tax is levied as a percentage on the income of the company.
• Once the company is shifted to another country or tax haven (s), the tax base is eroded, and  hence the incomes or profits of companies are also shifted to tax havens .
• Tax is not paid to the country of operation rather to the tax havens.

Base erosion and profit shifting (BEPS) : 

Base erosion and profit shifting (BEPS) can be understood from two perspectives:

1. One is common practices adopted by MNC’s that exploit gaps and mismatches in tax rules to avoid paying tax.
2. Other is strategies adopted by countries across the world to check the evasion of Taxes by MNC's.

In October 2021, a historic two-pillar international agreement Base erosion and profit shifting  2.0 was reached among 137 countries of the OECD/G20.

Base erosion and profit shifting (BEPS) has two pillars :

PILLAR 1 (MINIMUM TAX AND SUBJECT TO TAX RULES):

• Governments can fix local corporate tax rate to attract MNC's, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum.
• This minimum taxation is to neutralize  the advantage of shifting profits and hence demotivate companies to shifting their offices to Tax Havens.

PILLAR 2 (REALLOCATION OF AN ADDITIONAL SHARE OF PROFIT TO THE MARKET JURISDICTIONS):

• Portion of MNEs’ profits (25% of the largest multinationals’ so-called excess profit) is allocated to the market or destination countries .
• Destination countries are based on where consumers or users are located, rather than solely on physical presence.
• By doing this, countries which are giving incomes to the MNC's will be benefited.

INDIA AND BEPS :

India is actively participating in the implementation of Base erosion and profit shifting (BEPS).In 2016, India adopted Equalisation levy .

Digital Tax /GOOGLE TAX OR EQUALISATION TAX: 

• Equalisation levy, introduced in 2016, is a unilateral amendment to the domestic tax provisions to implement  BEPS Action Plan 1. 
• Equalisation levy was introduced in India  to tax the digital Economy.
• Equalisation levy was levied at 6% of the total business transactions done for online and digital advertisements.
• Equalisation levy is applicable to B2B services and goods only and NOT on B2C {Business to Consumer} goods and services. 
•  The tax is applicable to only those companies which have no permanent physical establishment in India.  
• Its scope was widened in 2020 and it was  levied at 2% on the consideration amount paid to non-residents who own, operate or manage an e-commerce facility or platform. 

Once India implements the two-pillar tax package, it will have to withdraw the equalisation levy (EL), which earned the government a revenue of about Rs 5,000 crore in 2022-23,”