Trump's Withdrawal from OECD Global Tax Deal Will Not Affect India's Tax Collection, Experts Say

The Trump administration's decision to exit the OECD's global tax agreement will not affect India, but it could hinder international efforts to establish a global minimum tax, experts noted. Shortly after assuming office, US President Donald Trump declared the Global Tax Deal ineffective in the US, undermining the OECD's progress in uniting 140 countries to impose a minimum 15% tax on multinational corporations' profits.

Representative image

Nangia & Co LLP's Managing Partner, Rakesh Nangia, highlighted that the US withdrawal would significantly impact the global tax framework, especially for jurisdictions that have already implemented or are progressing towards adopting the Global anti-Base Erosion Model (GloBE) rules under Pillar 2. Approximately 50 jurisdictions have made strides in adopting these rules and will now need to reassess their strategies.

India's Approach and Recent Developments

India has maintained a cautious stance on adopting GloBE rules and has yet to introduce substantial legislative changes in this area, according to Nangia. In the Union Budget 2024, India also removed the 2% equalisation levy, which had been a contentious issue with the US. Consequently, the US withdrawal from the global tax deal is unlikely to impact India's tax collection significantly.

In 2021, nearly 140 countries endorsed the OECD's global tax agreement. This two-pillar solution aimed to address aggressive tax competition and discourage cross-border tax avoidance by companies. Pillar 1 sought to reallocate large multinationals' residual profits from their home countries to jurisdictions where they generate revenue. Pillar 2 established a 15% global minimum corporate tax.

Concerns for US Companies

Yeeshu Sehgal, Head of Tax Markets at AKM Global, explained that OECD's Pillar 2 initiative sets a minimum tax rate of 15% for all signatory countries. This has raised concerns in the US because its current tax rules might conflict with this new global minimum tax. One concern is that some US companies might end up paying taxes twice on the same income.

Another issue is that these new rules could alter how taxes are calculated, potentially increasing the burden on US companies with international operations. Sehgal noted that India is observing these developments closely before making any decisions, ensuring clarity in new rules before implementing them domestically.

Earlier statements by Mr. Trump and other Republican lawmakers indicated that the US was never fully committed to the OECD's global tax deal. It was always a matter of when they would withdraw rather than if they would do so, Nangia remarked.

India's cautious approach means it is waiting to see how these issues unfold before committing to any changes. This strategy allows India to ensure clarity and stability in its domestic tax laws before implementing new international rules.

The decision by the US might force the OECD to reconsider its approach and possibly return to discussions to find a new consensus on global taxation standards.