Implementing the Globe Proposals in India

Implementing the Globe Proposals in India

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Unlike a fair proportion of the members of the OECD, India does not have CFC provisions in its domestic income tax statute. They were included in the Direct Taxes Code Bill 2010, which was introduced to Parliament in August 2010 but never enacted. It was intended to replace the existing Income Tax Act of 1961 with new legislation. The adoption of the Pillar 2 GloBE Proposals would concentrate policy decisions in India that take into account the current regulatory environment for MNEs with Indian headquarters. According to statistics, India's average annual outbound FDI over the past 20 years has exceeded US$9 billion, and these FDIs were mostly governed by foreign exchange restrictions. This Investment in overseas companies would produce and amass income abroad, net of dividends that were returned, year after year. The income-tax legislation does provide the following particular provisions for taxing the profits of foreign businesses that are subsidiaries of Indian businesses or under the management of Indian citizens:

1. Indian parent businesses are encouraged to obtain dividends from their foreign subsidiaries by taxing such dividend income at a rate lower than the standard tax rate that applies to dividends received as shareholders of domestic enterprises.

The POEM or, the Place of Effective Management rule, that happens to be the part of the income tax code, regards foreign-incorporated businesses the same as domestic ones, making their worldwide profits taxable in India if it can be proven that they are effectively controlled and managed from India. The POEM rule is a fact-specific exercise designed to cover a specific subset of cases to tax the yearly corporate profits of a foreign company on the justification that, even though it was incorporated abroad, since its decisions are made by people in India, India would be where its tax residence would be. On the other hand, a CFC taxes the passive income of a controlled overseas subsidiary as though it were income to the domestic parent company that controls the subsidiary (of the MNE group).

So, in addition to foreign exchange management restrictions and reporting, the Indian regulations also include anti-avoidance rules through a POEM, which may reduce the need for a CFC rule as a distinct anti-avoidance provision. India will enjoy the advantage of starting over when implementing GloBE Rules under Pillar 2 because it is not constrained by an existing CFC regime. Once the GloBE Rules are implemented through international consensus under the inclusive framework, India will be able to incorporate Pillar 2-based GloBE Rules into its domestic income-tax legislation. The GloBE regulations would unavoidably be applicable to MNEs that reach a €750 million turnover threshold under the current Pillar 2 consensus. Every nation's first option would be to use a separate turnover level to apply the GloBE top-up tax rate to the parent business of its MNE group with its headquarters. 12 As a result, the pattern for policy formulation in India might be as follows:

a. The imposition of top-up tax rates (up to the global minimum corporation tax) on MNE organisations with a turnover threshold of more than €750 million under the GloBE rules (IIR and UTPR).

b. Determining if a standalone IIR's scope should include a lower turnover criterion.

c. While maintaining the incentive to repatriate dividends, harmonise the GloBE regulations to guarantee that there is no possibility of double taxation given the legal system in India.

In conclusion it must be noted that the Tax authorities in India, after a global consensus under Pillar 2 on implementing a global corporate minimum tax rate is arrived at, could issue a discussion paper to get stakeholder inputs on the potential GloBE provisions in the domestic law to help arrive at a set of rules that are simple and predictable in their design and application.