How do India’s International Tax Policies align with the global tax reforms?

India’s tax policies are evolving to align with the International tax reforms and create a fair and competitive tax scenario.

Here is how India’s International Tax policies integrate with the global tax reforms-

• BEPS Action Plan: The Base Erosion and Profit Sharing (BEPS) framework initiated by G20 and OECD aims to curb tax avoidance by multinational corporations. The five BEPS recommendations are –

1. Equalization Levy- It taxes digital transactions from non-resident companies ensuring fair taxation of digital services.
2. Master File and Country-by-Country Reporting – To increase transparency in the financial reporting of multinational companies and reduce profit sharing to the low-tax jurisdictions.
3. Signatory of Multilateral Instruments- India signed the MLI to prevent tax treaty abuse and promote fair taxation.

• Pillar One and Pillar Two Taxation: The OECD two-pillar solution aims to revolutionize tax rules for the digital economy. The Pillar ensures that multinationals pay their taxes where they generate revenue rather than shifting profits to low-tax jurisdictions. The Significant Economic Presence rules to tax foreign digital businesses with significant user bases is introduced. Pillar two introduces a 15% global minimum corporate tax to prevent companies from shifting their profits to tax havens.
• Transfer Pricing Norms: The transfer pricing laws are according to the OECD norms to prevent tax avoidance by the MNCs. The key steps include ensuring the related party transactions with the MNCs are conducted at a fair market value. Pre-defined tax rates are provided for certain international transactions to reduce litigation. The advanced pricing agreements allow the companies to negotiate tax treatment of cross-border transactions, ensuring stability.
• Global Tax Cooperation: India actively participates in global tax discussions through the OECD G 20 inclusive framework on BEPS. Through automatic exchange of information agreements, India shares tax data with more than a hundred countries to curb tax evasion. The FATCA Agreement with the USA ensures transparency in financial transactions for Indian entities with US ties.
• Challenges: There are many challenges that still remain for India in aligning with the global tax reforms. The new tax rules may increase compliance burdens for MNCs. The equalization levy has faced resistance from the USA leading to trade tensions and finally, the implementation of the global minimum tax requires careful policy adjustments to protect India’s tax revenues.

India will continue refining its international tax policies to balance revenue collection, global tax fairness, and ease of doing business. With its ongoing tax reforms, the country is poised to remain an attractive investment destination while also ensuring fair taxation of global businesses.

Understanding the tax reforms is important and thus working with professional International tax services in India will help businesses understand how the tax reforms impact their business and help them make informed decisions.