Global minimum tax: Will India’s budget offer a Pillar Two roadmap?
The corporate tax landscape is undergoing a seismic shift, globally, with the advent of the Global Minimum Tax, also known as Pillar Two. By 2024, this initiative had been adopted by 30-plus countries, signalling the most significant reform of international tax regulations in a century. Prepared under the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework, which encompasses over 140 countries, Pillar Two is poised to redefine the fiscal obligations of multinational enterprises (MNEs).
Pillar Two aims to curb profit-shifting and ensures that MNEs pay a minimum level of tax in all the countries where they operate. It applies to MNEs with global revenues above €750 million annually and they must pay a minimum effective tax rate (ETR) of 15% on a country-by-country basis. How does it work? The mechanics of Pillar Two are transformative.
Should an MNE’s ETR fall below 15% in any given country, a supplementary top-up tax is levied to make up the difference. This top-up tax is payable to the nation where the MNE’s parent company is based. For instance, an Indian MNE with subsidiaries in the UAE and Germany that has an ETR of 9% in the former country and 30% in the latter would be subject to a 6% top-up tax in India for the shortfall in the UAE.
However, the UAE will have the first right to collect this tax if it enacts a compatible domestic minimum tax. If neither India nor the UAE enacts Pillar Two, Germany would be able to collect the UAE shortfall through a backstop rule known as the under-taxed profit rule (UTPR), which is set to take effect in several countries from 2025. Pillar Two has been designed in such a way that if even one country legislates it, the entire top-up tax could be
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