International business and tax evaluation is a challenge to the Indian government. The Indian government welcomes foreign direct investment and constantly monitors the international establishment. In October 2023, the Indian tax department had examined around 40 solar modules. These modules are made in China and distributed in India. The reason behind this operation is the fear of tax evasion. The permanent establishment services open the door to multinational corporations. The rules of permanent establishment services are not the same in all jurisdictions. The inter-state tax disputes are solved using the OECD and the UN model. The UN model is the model of tax payment system in developed and developing countries. The model provides the definitions and articles. The knowledge from these models clarifies the terms in the tax agreement between countries. The OECD model is the law rules that help to understand double taxation in international countries. The knowledge of these two laws is inevitable for companies operating in foreign countries. On July 1, 2021, the OECD released a framework for international taxation. The BEPS 2.0 is the set of rules that explains the global minimum tax rates and equitable distribution of tax burden. The blog explains the two pillars or parts of the BEPS 2.0 package and globalisation. The global tax system resolves the conflicts in the Indian tax system. The blog engages the readers with a broad view of international taxation, globalisation and e-commerce business.
Two pillars of BEPS 2.0:
- BEPS stands for base erosion and profit shifting framework. Pillar one explains the part of digitalisation and enterprises with consumer-centric operations. The objective of this rule is to make the multinationals realise the importance of paying taxes in a country where they have customers or users. The OECD is targeting companies with a high turnover from global operations. Companies with a turnover of EUR20 billion or USD21 billion are under the focus of the OECD. After seven to eight years of strict rules in international taxation, the threshold will be down to EUR 10 billion. The residual profit of 20 to 30 per cent in the market jurisdiction would be taxed.
- Pillar two talks about the global minimum tax rate. It targets business groups with a large global turnover. The implementation is with companies that have a turnover of EUR750 million. The difference between the jurisdictional tax and the global minimum tax of a company is paid by the parent or subsidiary company operating in a particular location. Such companies are liable to pay a minimum tax of 15 per cent in the countries with commercial operations. The top-up taxes are collected with a priority to the subsidiary company followed by the parent company and finally levied over another subsidiary company.
Views of different countries on International taxation:
- Shin taro Yamaguchi is the partner of PWC, Japan. He says that the provision in new international tax rules explains the key points like the calculation of top-up tax and the liability of constituent entities for paying the top-up tax. In Japan, the new income inclusion rule will be from 1, April 2024. The multinationals operating in Japan must pay the global minimum local corporate tax and international global minimum corporate tax.
- In South Korea, the rule will take practical form from 1, January 2024. South Korean government had announced the implementation of the new top-up tax rules from 18, January, 2023. The local business owners argue that the South Korean government implement the global rules without a complete evaluation of the development in the country. The ministry said that the implementation depends upon the global situation and jurisdictions with economic development.
- Malaysia is not a member of the OECD. Prabu Chaloraju is the tax and treasury director of an international firm of accountants and attorneys. He says that the transfer pricing guidelines and BEPS recommendations have similar points. An income inclusion tax and backstop undertaxed payments are about to come into practice in 2024. All these rules of Malaysia end with a top-up of a 15 per cent tax rate. The 15 per cent is the minimum tax rate of the global tax system.
- Many Asian countries focus on attracting multinational companies. International taxation norms are the entry point for MNC companies. Thailand has plans to introduce new Thai regulations that are similar to OECD’s pillar two.
- Vietnam had signed the MAAC to express cooperation in the administration and prevention of tax evasion. The Vietnamese authorities are planning to implement the OECD pillar two recommendations. In 2024 Vietnam is implementing domestic top-up tax and income inclusion. In 2025, Vietnam is implementing an under-taxed payments rule.
- The OECD rules will affect companies with multijurisdictional tax liabilities. China is a non-member country for OECD guidelines. The CIT rate in the mainland is 25 per cent. The CIT rate in other jurisdictions is 15 per cent. The minor adjustments are essential only for certain jurisdictions in China. The minor adjustments are to adjust the domestic and international tax laws.
Difference between e-commerce and permanent establishment:
There are arguments in the USA, Italy, and other foreign countries about e-commerce and permanent establishment. The US Treasury Department says that mere electronic presence with a website and server is not considered as a PE. Another argument is that the activities performed by a company through online transactions are limited in number. Italy argued that the actions of a server and an agent are similar. And therefore, the company operating through e-commerce cannot be the dependent agent.
Globalisation attracts MNC companies and FDI. The global and domestic taxes tend to operate in sync with the jurisdiction of the company. The automatic system or e-commerce business can end as a permanent establishment in a country. The sales volume and physical presence are the factors that decide the company as an e-commerce or permanent establishment. Some countries argue that e-commerce is similar to PE if the server can finalise contracts, handle payment and deliver goods. Tax laws distribute the tax burden of the population to the company management.