Budget 2024: Measures Modi govt can take to navigate global taxation shifts
The traditional basis for taxing Multinational corporations relying on physical presence, has given way to a changing paradigm influenced by digital business models. Historical taxation practices centered around fixed places for business activities, employees, dependent agents, warehoused stock and equipment leasing.
The surge in digital operations, however, has led to the inception and evolution of the Two-Pillar Solution under OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
BEPS 2.0 signifies a historic reform of the international tax system, emphasizing digitalized businesses and an attempt to rationalise taxes especially across low tax jurisdictions. This shift is particularly relevant for India, China and other nations seeking to protect their “source” tax base.
Unilateral measures, such as Significant Digital / Economic Presence (SEP) and Equalization Levy (EL), have been introduced by countries like India to respond to these developments.
While EL and similar taxes contribute to source jurisdictions, concerns arise as they may not be creditable in the home country, leading to potential distortions in global tax collections.
MNEs also face a complex international tax landscape characterized by anti-abuse measures like the “Principal Purpose” and “Limitation of Benefit” Test. The subjective nature of these tests results in lack of uniformity and subjectivity in their interpretation and application.
