Digital tax for US companies to stay until OECD pact comes into force

 The US to withdraw the threat of retaliatory trade action

The 2 percent equalization levy imposed by India on digital players will continue for US companies until a global agreement on taxing multinational enterprises (MNEs) comes into effect on March 31, 2024, whichever is earlier. The United States, on the other hand, has committed to withdrawing its threat of retaliatory trade action against India, according to an agreement reached between the two countries on Wednesday.

New Delhi and Washington have agreed to count the benefits of a global agreement on taxation from the next financial year. However, the benefits would actually accrue once the global pact comes into effect or March 31, 2024, whichever is earlier, in the form of credit, according to the reading of the pact by experts.

According to the bilateral agreement, India’s equalization levy will not go away in the interim period, which starts from April 1, 2022. However, once the global agreement (Pillar-1) comes into effect, it would be calculated whether MNEs have paid higher tax in the form of an equalization levy than what is liable under the agreement. The excess amount will be calculated on the basis of the first year of Pillar 1 implementation.

In case they have paid the higher tax, the excess amount would be given as credit to the companies. It is expected that global taxation would be less than the equalisation levy. The exact modalities of the credit would be decided later.

According to the agreement reached under the aegis of the Organisation for Economic Co-operation and Development (OECD) and later endorsed by G20 in October, there is a two-pillar approach to taxation.

Under Pillar 1, MNEs with global sales above €20 billion and profitability above 10 per cent -- the kind of companies that can be regarded as the winners of globalization -- will be covered by the new rules, with 25 per cent of profit above the 10 per cent threshold to be reallocated to market jurisdictions. This will generate additional tax revenues of $125 billion annually.