Are the GloBE rules good for India?

🗳 With national elections in India underway, both major national parties promising to revamp the country's income tax laws, and the GloBE rules already in effect in a number of major countries, it seems increasingly likely that India will enact a domestic equivalent of the model rules.

What does this mean for India? (Very) simply put:

🌍 The GloBE rules are intended to limit harmful tax competition, ensuring that large multinational enterprises with annual book revenue in excess of EUR 750 million are subject to a minimum 15% tax on their global income.

📕 To ensure this, countries must enact law that allows for the application of an income inclusion rule (the "IIR"), an undertaxed profits rule (the "UTPR") and the imposition of a qualified domestic minimum top-up tax (the "QDMTT").

🔝 First, to determine whether any of these rules are implicated, we need to determine the potential top-up tax:

✔ Aggregate the MNE's income in a each jurisdiction ("GloBE Income")

✔ Determine the taxes paid in each jurisdiction ("Adjusted Covered Taxes")

✔ Calculate the effective tax rate ("ETR") in each jurisdiction by dividing the Adjusted Covered Taxes by aggregate GLoBE Income to identify "Low-Tax Jurisdictions".

✔ Compute the excess of the 15% minimum tax rate over the jurisdiction ETR (the "Top-Up Tax Percentage") for each Low-Tax Jurisdiction.

✔ Apply the "substance-based exclusion" ("SBIE") to determine "Excess Profits" in each Low-Tax Jurisdiction. Excess income is the excess of the Aggregate GloBE Income over the SBIE i.e., the sum of 5% of the carrying value of eligible in-jurisdiction tangible assets and 5% of the eligible in-jurisdiction payroll costs.

✔ Multiply the Top-Up Tax Percentage by the Excess Profit to determine the potential Top-Up Tax due for each jurisdiction.

💰 Second, we determine who collects the Top-Up Tax:

✔ If the Low-Tax Jurisdiction has implemented a QDMTT, it collects the Top-Up Tax due for its jurisdiction (the "use-it-or-lose-it" principle).

✔ The aggregate Top-Up Tax due from the MNE is reduced by the aggregate QDMTTs imposed by Low-Tax Jurisdictions.

✔ If the jurisdiction in which the ultimate parent entity (UPE) of the MNE has enacted an IIR, it collects the remaining Top-Up Tax due from the MNE. If it hasn't, any jurisdiction in which an intermediate holding entity is situated, which has also enacted an IIR, collects the remaining Top-Up Tax.

✔ If no jurisdiction has enacted an IIR, then any jurisdiction(s) in which the MNE operates, if it has enacted a UTPR, will collect the remaining Top-Up Tax.

🚲 To be clear, this is a vastly simplified version of the way the GloBE rules are intended to operate. But it suffices to create a framework in which to understand and appreciate the potential consequences and issues in the Indian context.

📊Will the GloBE rules move the needle on India's tax collections?

🚩In an inbound context, an MNEs GloBE income in India will not include income that is not earned through an in-country legal entity or in-country permanent establishment. For example, income earned from India by large tech through the delivery of services is largely untaxed in India (absent the existence of a permanent establishment or the characterization of the income as royalty or fees for technical services). But, because this income is not earned through a legal entity or permanent establishment situated in India, it will not form part of GloBE Income, therefore will not have the effect of lowering India's ETR, and therefore will not will not be caught within the net of an Indian QDMTT. Note that most other income earned by an MNEs legal entity or permanent establishment of a MNE in India would taxed in India (usually) at well over 15%.

This income will, however, be included in the in-country GloBE income of the jurisdiction where the entity that earned it is located, and to the extent that that country is a Low-Tax Jurisdiction that does not impose a QDMTT, and in the unlikely event that the jurisdictions in which the MNEs UPE and relevant intermediate holding entities are situated do not impose an IIR, India may benefit from collecting a portion of the remaining Top-Up Tax under an Indian UTPR.

It seems unlikely then that India will benefit significantly from the imposition of a QDMTT, and Pillar 1 will remain the primary vehicle by which to bring the untaxed tech company income into the Indian tax net.

🚩 Also in an inbound context, it is possible that the UTPR is in violation of international law and existing tax treaties rules. It could possibly also be seen as discriminatory. Legal challenges to the UTPR are sure to be brought, and if successful, will further reduce the attractiveness of the GloBE rules.

🚩 The real benefit may lie in the outbound context, where India, as the UPE jurisdiction, may stand to benefit from the enactment of an IIR. But to understand the extent of the benefit, we need to know how many India-headquartered MNEs would actually be brought within the scope of the rule (i.e., how many India-headquartered MNEs have annual book revenue in excess of EUR 750 million). I don't know the answer, but there can't be many. Also important to understand will be the extent to which these entities operate in low-tax jurisdictions abroad (that have not also imposed a QDMTT). This too is unclear. It's possible there will be some incremental tax revenue, but it's unlikely to be significant.

🚩 Also in an outbound context, the application of the place of effective management (POEM) residency test could throw up some nasty surprises. In cases of dual-residence, both residence jurisdictions may seek to impose an IIR, leading to double taxation. How these issues will be resolved is unclear. But it is possible that the existing framework for resolving cases of dual-residence under bilateral tax treaties may be of assistance.

🎯 In conclusion, there's still a lot that we don't know. Before India implements the GloBE rules, it would be prudent to engage in an empirical assessment of what India's stands to gain, and what India stands to lose. Any incoming government should consider whether the additional tax revenue is worth the resources that will inevitably be spent navigating the complexity and resolving the legal challenges that are sure to follow. In doing so, the incoming government would be wise to be transparent. Extensive public consultation on the rules would benefit everyone and the country. A stitch in time saves nine.