Recent developments on OECD Pillar One & Two norms and Article 12B of UN Model Convention

International taxation has been the focus of attention for a number of years in the fast-paced global economy. Of particular interest are the activities of multinational enterprises (MNEs), which have the ability to shift profits between different countries, and thus avoid tax liabilities.

The Organisation for Economic Co-operation and Development (OECD) has been working on a project which aims to address tax issues around base erosion and profit shifting (BEPS). This project resulted in the development of two new norms: Pillar One and Pillar Two.

“Amount A” of Pillar One seeks to ensure that a portion of profits of MNEs is allocated to the countries where they earn revenues (i.e. market economies). “Amount B” of Pillar Two seeks to simplify the Transfer Pricing norms for MNEs engaged in baseline marketing or distribution activity in the market jurisdiction. Work around Pillar One has not yet attained finality.

Pillar Two aims to introduce a global minimum tax rate, to prevent MNEs from shifting profits to low-tax jurisdictions. As of now, around 35 countries have introduced Pillar 2 norms in their jurisdictions. Given that Indian MNEs having presence in any of these 35 countries will be subject to Pillar 2 norms, it is time for them to gear up for complying with Pillar 2 norms.

One of the first steps that MNEs should take is to conduct an impact analysis of the proposed rules. This will help them to understand how the new norms will affect their taxation across the globe.

The success of any implementation plan will depend on the involvement of the various stakeholders from Tax, Finance, IT, and HR teams. It is important to create internal awareness sessions with these stakeholders to ensure that everyone is on the same page and understands what is required of them in terms of collating the umpteen number of data points required for registration of the MNE in certain overseas jurisdictions and for conducting the complex GloBE computations.

MNEs may significantly benefit from exploring the use of automated technology tools which can be of great help to them in complying with the Pillar Two requirements.

Apart from the above developments, there are some important developments within the United Nations, pursuant to which Article 12B has been incorporated into the United Nations Model Convention on Double Taxation.This Article provides for taxation of "income from automated digital services,” and empowers source countries (i.e. market economies) to tax such income. For Article 12B to become effective, it will have to be bilaterally/ multilaterally agreed amongst different countries, pursuant to which it will get incorporated into the Double Tax Avoidance Agreements between them.

The introduction of the new norms by the OECD and United Nations (especially Pillar Two) will affect how businesses operate globally, and it is important for Indian MNEs to start preparing for their implementation. By conducting an impact analysis, creating internal awareness sessions, and exploring the use of technology tools, MNEs can ensure that they are ready for the changes in the new world of international taxation.