OECD Tax Proposals and Implications for India (UPSC Economy)

Multinational companies have long used legal structures in low-tax jurisdictions – Mauritius, Singapore, the Cayman Islands, Bermuda, Panama and Ireland – to shift profits out of high-tax countries where the value was actually created. The practice, called Base Erosion and Profit Shifting (BEPS), is estimated by the Tax Justice Network to cost governments over USD 480 billion a year in lost revenue. India's annual tax losses from corporate tax abuse alone are put above USD 10 billion. The OECD/G20 Inclusive Framework, of which India is a core member, has been building a Two-Pillar response that promises the biggest overhaul of international tax in a century.

The BEPS Challenge

Legacy tax rules assume brick-and-mortar businesses with a permanent establishment – a factory or office – in each country of operation. Digital MNCs like Google, Meta and Amazon earn significant revenues in India without such physical nexus. Traditional rules do not allocate the right to tax these profits to India. Legal tax planning has compounded the problem, with profits parked in subsidiaries in low-tax jurisdictions while revenue-generating activity happens elsewhere.

Pillar One: Reallocation of Taxing Rights

Pillar One addresses nexus – where tax should be paid – and profit allocation – how profits should be split between market jurisdictions.

Coverage

• MNCs with global turnover above EUR 20 billion and profit margins above 10 per cent (threshold to drop to EUR 10 billion after review).
• Extractives and regulated financial services carved out.

Amount A

• 25 per cent of the residual profit (profit above a 10 per cent margin) reallocated to market jurisdictions.
• Allocation by share of MNC revenue earned in a country, subject to a EUR 1 million revenue nexus threshold (EUR 250,000 for smaller jurisdictions).

Worked Example

A MNC with USD 100 billion revenue and 15 per cent profit margin earns USD 15 billion. Residual profit is 5 per cent of revenue, i.e., USD 5 billion. Of this, 25 per cent (USD 1.25 billion) is reallocated by revenue share. A country that hosts 10 per cent of the MNC's revenue receives USD 125 million of taxable profit.

Pillar Two: Global Minimum Corporate Tax

Pillar Two imposes a global minimum effective tax rate of 15 per cent on MNCs with consolidated revenue above EUR 750 million.

Working

• If an MNC pays less than 15 per cent in any jurisdiction, the Income Inclusion Rule (IIR) allows the parent's country to top up.
• The Undertaxed Profits Rule (UTPR) allows other jurisdictions to tax if the parent country fails to act.
• A Qualified Domestic Minimum Top-up Tax (QDMTT) lets the source country collect the top-up itself.

Rationale

• Curbs race to the bottom: Average corporate tax rate has fallen from 32 per cent in 2000 to about 21 per cent in 2024.
• Caps tax havens: Countries like Bermuda and Cayman, with zero corporate tax, must either raise rates or cede revenue to home jurisdictions.
• Broad fiscal gains: OECD estimates USD 220 billion in additional annual revenue worldwide from Pillar Two.

Challenges

• US politics: The US enacted the Inflation Reduction Act with a 15 per cent corporate alternative minimum tax but has not ratified the full Pillar Two framework. A change of administration in 2025 has injected fresh uncertainty.
• Developing country concerns: Low-tax incentives have been a key tool for FDI attraction.
• Sovereignty: Critics see a cartelisation of tax policy.
• Implementation complexity: Multiple reporting and top-up regimes create compliance burdens.

India's Stake

Revenue implications

India, with its vast digital consumer base, is a primary beneficiary of Pillar One. Large shares of Google, Meta and Amazon residual profits would flow to the Indian tax net. Quantifying the gain is difficult but most estimates place the annual upside at USD 1 to 2 billion.

Equalisation levy

India unilaterally imposed a 2 per cent equalisation levy in 2020 on e-commerce supplies by non-residents, on top of a 6 per cent levy on online advertising introduced in 2016. Under the Pillar One deal, India must repeal its levy as a condition of participation. Losses from this repeal could offset some Pillar One gains if the new regime under-delivers.

Expansion of coverage

India has pushed to lower the Pillar One turnover threshold and bring more MNCs under the regime. It has also argued for a higher allocation rate closer to 30 per cent.

Indian IT MNCs

TCS, Infosys, Wipro and HCL cross the Pillar Two threshold and must adapt transfer pricing and tax provisioning. Indian operations are already taxed at effective rates above 15 per cent, so QDMTT risk is limited, but they face global compliance costs.

Minimum corporate tax

India's headline corporate tax rate is 22 per cent (15 per cent for new manufacturing), comfortably above the 15 per cent floor. Pillar Two therefore erodes the comparative appeal of tax havens without forcing India to adjust its domestic incentives, creating a net positive for FDI flows.

Latest developments (2024-26)

• Pillar Two in force: Over 50 jurisdictions including EU members, the UK, Japan, South Korea and Canada started applying Pillar Two rules from 1 January 2024. Canada, Japan and Australia began QDMTT collections in 2025.
• Pillar One delay: The multilateral convention for Amount A missed its June 2024 signing deadline. Negotiations continue; most observers now target 2026-27 for rollout.
• India's equalisation levy: Phased out partially; the 2 per cent e-commerce levy abolished with effect from August 2024 as a confidence-building move. The 6 per cent advertising levy remains pending final Pillar One adoption.
• Budget 2025-26: Introduced domestic legislation consistent with Pillar Two for Indian-headquartered MNCs with global consolidated revenue above EUR 750 million, effective April 2026.
• Global South push: India, Brazil and African Union have pressed for a UN Tax Convention, now under negotiation, as an alternative forum to the OECD-led process.
• G20 coordination: Under the Brazilian G20 presidency (2024) and South Africa (2025), tax cooperation and taxation of the super-rich took centre stage, with India supporting the broader Global South agenda.
• Revenue realisation: Early Pillar Two collections in the EU in 2024 totalled close to EUR 40 billion, ahead of projections.

Way Forward for India

• Protect revenue interests by negotiating a higher Amount A share and lower thresholds.
• Calibrate repeal of equalisation levy against Pillar One implementation progress.
• Build capacity in CBDT's international tax division to administer the complex regime.
• Support the UN Tax Convention track while staying engaged with the OECD process.
• Integrate Pillar Two compliance with the Income Tax Bill 2025.

UPSC Relevance

OECD tax proposals are a flagship GS III topic on international taxation, bilateral treaty networks and globalisation. Mains prompts routinely ask candidates to analyse BEPS, Pillar One/Two, and the trade-offs for India. Prelims can test the 15 per cent rate, EUR 20 billion and EUR 750 million thresholds, equalisation levy history, and UN Tax Convention developments. Essay and GS II questions can link the theme to multilateralism, sovereignty and Global South diplomacy. Candidates should memorise the two-pillar architecture, the worked example logic, and India's negotiating stance.