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The 18th G20 Summit convened under India’s Presidency for the first time, with the underlying theme of ‘Vasudhaiva Kutumbakam’, has accomplished the major breakthrough on 9.9.2023, with the adoption of the G20 New Delhi Leaders’ Declaration. This Joint Declaration has been adopted after reaching the mutual consensus on several important agenda items like the Digital Public Infrastructure, Gender Equality and Women Empowerment, Countering Terrorism and Money Laundering, Green Development Pact and Financial Sector Reforms for strong, sustainable, balanced and inclusive growth. The agreements on the inclusion of the African Union in the G20 group and thereby making it the G21, the Global Bio Fuel Alliance and the India Middle East Europe Economic Corridor are also the historic milestones of this G20 Summit hosted under India’s Presidency.
Usually when the leaders of G20 Nations meet and deliberate upon various path-breaking socio-economic and geo-political policy decisions, it naturally is seen as a progressive and comforting thing, but when they also discuss ‘TAX’, it also raises curiosity and anxiety as to what is in the offering. In their joint Declaration, the G20 leaders have reaffirmed their commitment to continue cooperation towards a globally fair, sustainable and modern international tax system appropriate to the needs of the 21st century.
The G20 leaders have agreed for the swift implementation of the Two-Pillar international tax package.
The Pillar One allocates certain portion of the taxing right to market jurisdictions, from the residential jurisdictions. For instance, under Pillar One, India will be able to impose certain portion of income tax on the sales generated in Indian marketplace by the giant e-commerce digital platforms like Amazon, Google, Facebook, ChatGPT etc, which otherwise claim non applicability of any Indian tax liability in the absence of any Permanent Establishment (PE) in India. However, unilateral measures like equalisation levy will require withdrawal after implementation of Pillar One.
The big USA based MNCs like Apple, Amazon, Google and Facebook have consistently used meticulously knitted webs and complex networks of international subsidiaries incorporated in low tax jurisdictions or tax havens with multiple routes to minimise their tax incidences by moving their bases or profits from higher tax jurisdictions to lower tax jurisdictions or tax havens. Pillar Two provides for the levy of a Global Minimum Corporate Tax Rate of 15% on all such big MNCs, whereby any shortfall between such global minimum tax rate and the tax rate in the low tax jurisdiction will have to be paid by such MNCs as a top up tax.
Significant progress has been made on Pillar One including the delivery of a text of a Multilateral Convention (MLC), and work on Amount B (framework for simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities) as well as the completion of the work on the development of the Subject to Tax Rule (STTR) under Pillar Two. The G20 group has called on the Inclusive Framework to resolve swiftly the few pending issues relating to the MLC with a view to preparing the MLC for signature in the second half of 2023 and completing the work on Amount B by the end of 2023.
The MLC sets out the substantive features of Amount A, including the scope of the taxing right, which covers MNEs with revenues above EUR 20 billion and profitability above 10%, and applies to 25% of the profit in excess of 10% of revenues. The revenue threshold will be lowered to EUR 10 billion after 7 years, conditional on the successful implementation of Amount A.
The MLC also includes several provisions designed to address the unique circumstances of developing countries, including the tail-end revenue rule for revenue sourcing, a lower nexus threshold and several de minimis thresholds to ensure small and developing countries fully benefit from Amount A allocations.
Amount B holds particular significance for low-capacity countries, who lack appropriate local market comparables through which arm’s length prices can be established. Moreover, it is expected to reduce disputes, enhance tax certainty, and promote more efficient utilisation of resources for both taxpayers and tax administrations. The steps taken by various countries to implement the Global Anti-Base Erosion (GloBE) Rules as a common approach have also been welcomed in the joint declaration.
The implementation of the global minimum tax is now well underway and will come into effect from the beginning of next year. To date, around 50 jurisdictions have taken steps to implement the global minimum tax. This figure includes half the members of the G20 and all the member states of the European Union. The implementation of the global minimum tax continues to gather speed and it is estimated that by 2025 almost 90% of global multinational enterprises (MNEs) with revenues above EUR 750 million will be subject to a minimum effective tax rate of 15% in every jurisdiction where they operate.
The joint Declaration recognises the need for coordinated efforts towards capacity building to implement the two-pillar international tax package effectively and, in particular, envisages the roadmap 2023 of the G20/OECD on developing countries and International Taxation.
One of the major highlights of the joint declaration is the G20 group’s call for the swift implementation of the Crypto-Asset Reporting Framework (“CARF”) and amendments to the ‘Common Reporting Standard’ (CRS).
The CARF, developed in light of the rapid growth of the Crypto-Asset market and pursuant to a mandate from the G20, provides for the reporting of tax information on transactions in Crypto-Assets in a standardised manner, with a view to automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis. The CARF consists of rules and commentary which set out: i) the scope of Crypto-Assets to be covered; ii) the Entities and individuals subject to data collection and reporting requirements; iii) the transactions subject to reporting, as well as the information to be reported in respect of such transactions; and iv) the due diligence procedures to identify Crypto-Asset Users and Controlling Persons, and to determine the relevant tax jurisdictions for reporting and exchange purposes.
The IMF-FSB Synthesis Paper on Policies for Crypto Assets, conceived on the recommendation of G20 provides that Tax policies should ensure the unambiguous tax treatment of crypto-assets, and tax administrations should strengthen compliance efforts. Legal provisions should clearly reflect policy decisions on the tax treatment of crypto--assets, including income/wealth and value-added taxes, as discussed in detail in Baer and others (2023). Tax administrations should leverage third-party information, especially when intermediaries such as crypto-asset trading platforms, broker-dealers, and other intermediaries are involved, to enhance tax compliance.
Collaboration on cross-border information sharing and financial regulation is crucial for effective tax compliance. The adoption of frameworks like the Crypto-asset Reporting Framework (CARF) proposed by the OECD (2022b) can be beneficial. Improving institutional capacity, investing in specialised data infrastructure and analytics and prioritising training for tax administration staff are essential to support risk analysis and tax audits related to crypto-asset operations.
So, now the crypto transactions undertaken by Indians on foreign domiciled crypto exchanges will also come under the purview of automatic exchange of information protocol under CARF, and as such it will no longer be possible to hide or conceal such crypto transactions. Similarly, under the amended CRS, requiring more tax transparency with respect to financial accounts held abroad, it would become next to impossible for the Indians not to disclose their foreign bank accounts and assets holdings abroad, to the Indian tax Authorities.
The amendments to the CRS, which was first published by the OECD in 2014 and designed to promote tax transparency with respect to financial accounts held abroad, bring in its scope certain electronic money products and Central Bank Digital Currencies. In light of the CARF, changes have also been made to ensure that indirect investments in Crypto-Assets through derivatives and investment vehicles are now covered by the CRS. In addition, amendments have been made to improve the operation of the CRS based on the experience gained by governments and business in over 100 jurisdictions that have implemented the CRS, including by strengthening its due diligence and reporting requirements and providing a carveout for genuine non-profit organisations.
The Joint Declaration also requires the Global Forum on Transparency and Exchange of Information for Tax Purposes to identify an appropriate and coordinated timeline to commence exchanges by relevant jurisdictions, noting the aspiration of a significant number of these jurisdictions to start CARF exchanges by 2027.
The G20 group has also noted the OECD Report on Enhancing International Tax Transparency on Real Estate and the Global Forum Report on Facilitating the Use of Tax-Treaty-Exchanged Information for Non-Tax Purposes. At present the confidentiality laws of a tax haven /low tax jurisdiction often come in the way of Indian tax authorities, and also any information obtained through any tax treaty agreement in respect of any undisclosed foreign asset or real estate holding of an Indian resident, can’t be readily used by other regulatory agencies like the Enforcement Directorate, CBI, SFIO etc, other than the Income tax department. But, following a request from the Indian G20 Presidency, a methodology is being worked out to streamline the wider use of treaty exchanged information between interested jurisdictions.
So, all in all, post this historic G20 Summit convened successfully under India’s Presidency, non-disclosure of any crypto transactions, foreign bank account, or real estate holdings abroad, by an Indian Resident, to the Indian tax authorities, may prove to be a very costly affair in terms of regulatory fines and penalties.
[This Article has also been published in Taxmann with the citation [2023] 154 taxmann.com 174 (Article).
