Earlier this month, the US secured an exemption from the global minimum tax framework backed by the Organization for Economic Co-operation and Development (OECD), which allows its biggest companies to rely on domestic tax rules instead of the proposed 15% minimum rate.
The exemption, agreed in a framework approved by more than 140 countries, means Washington’s own tax rules will be deemed sufficient for US-based multinationals. While the move does not overturn the broader deal, it has raised questions about consistency between countries and whether the global consensus against tax avoidance could weaken over time, reviving fears of a “race to the bottom” in corporate tax rates.
Mint explains how the global tax deal works, why the US exemption has drawn attention and what it could mean for India.
What is the OECD BEPS project?
OECD and G20 countries, including India, have negotiated a new global tax architecture to curb base erosion and profit shifting (BEPS) – the practice of multinational corporations shifting profits to low-tax jurisdictions with little or no real economic activity.
The “Inclusive Framework” was launched in 2016 and by 2021 more than 140 countries have agreed on a two-pillar solution to address the tax challenges arising from digitization and globalization.
Under the second pillar, large multinational groups are subject to a 15% global minimum effective tax rate, implemented through coordinated national rules. The first pillar seeks to redistribute some tax rights to market jurisdictions such as India, where digital and consumer-facing companies generate revenue without a significant physical presence.
Together, the framework aims to restore taxation rights eroded by changes in business models. However, countries are at different stages of implementing these rules.
How does India stand on implementation?
Implementation of BEPS-related measures is uneven worldwide. A key instrument – the Multilateral Instrument (MLI), designed to quickly amend bilateral tax treaties to include agreed anti-avoidance standards – has been signed by about 100 countries and ratified by about 80.
Countries must announce which of their bilateral tax treaties the MLI applies to, and its application remains treaty-specific and subject to national practices. India has signed and ratified the MLI, but enforcement requires further domestic action.
Officials say India is watching global developments closely, especially given the uncertainty over implementation by major jurisdictions. The US, although participating in the BEPS negotiations, has not signed the MLI and instead favors changes to bilateral treaties and domestic legal measures.
What carveout did the US secure this month?
The US disagreed with some of the most critical elements of the OECD/G20 tax deal, including a global minimum tax and redistribution of tax rights.
In January of last year, President Donald Trump issued a memorandum stating that the US is no longer bound by the global tax agreement and that commitments made by previous administrations do not apply unless enacted by Congress. The memo also directed officials to investigate foreign tax measures affecting U.S. companies and consider “safeguard or other” measures.
Subsequently, on January 5 of this year, the OECD announced an exemption for US companies through a “side-by-side agreement”. Under this, the new safe harbors apply to multinational groups whose ultimate parent is located in an “eligible jurisdiction” that meets minimum taxation requirements. This effectively keeps US companies largely outside the OECD minimum tax net, as US domestic tax laws are seen as sufficient to address concerns about tax avoidance.
What are the implications of this carveout?
As the new safe harbors apply to any multinational group based in an eligible jurisdiction, other countries could potentially seek similar treatment in the future. This raises concerns that the global tax agreement could gradually be diluted.
The exemption also complicates efforts to create a single global tax architecture and could give U.S. companies a compliance and competitive advantage over companies from other countries that continue to be subject to “additional taxes” in many jurisdictions.
What steps has India taken so far?
According to Nitin Narang, partner at Nangia & Co LLP, India is actively moving towards implementing a global minimum tax, with domestic legislation expected soon.
“The main objective is to ensure that multinational enterprises (MNEs) pay a fair share of taxes globally and limit profit shifting. Domestic laws are in the process of introducing a 15% minimum rate. The Indian tax administration should also ensure that the GloBE rules do not create a risk of double taxation for MNEs while implementing global anti-base erosion rules or GloBE rules,” Narang said.
India has already withdrawn its 2% countervailing tax on goods, which has proved difficult to administer and has caused friction with trading partners. However, it will retain the 6% digital advertising tax until the first pillar is fully completed.
The first pillar aims to ensure that multinational companies pay taxes in the countries where they make profits, even without a physical presence.
