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Contributed on December 15, 2020

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Submission to OECD on Pillar One and Pillar Two Blueprints

Blog: NASSCOM Official Blog

Background:

The Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has been working to develop a consensus-based solution to address tax challenges arising out of digitalisation of the economy. In this regard, the OECD recently released Blueprints for public consultation on Pillar One and Pillar Two. These Blueprints reflect convergent views on key design features, principles and operative aspects of both Pillars, and identify remaining work on technical and administrative areas as well as policy issues where divergent views among Inclusive Framework members remain to be bridged.

Based on inputs from Industry, NASSCOM made a detailed submission to the OECD on queries raised in the public consultation document relating to Pillar One and Pillar Two Blueprints.

Key takeaways from our response submitted in relation to Pillar One Blueprint are as follows:

1. The Indian Information technology (IT) – IT enabled Services (ITeS) industry is predominantly engaged in providing customized services to customers wherein services require high degree of human intervention. Hence, these services are out of the proposed definition of “Automated Digital Services” (ADS).
2. There is lack of clarity in terms of Cloud Computing Services, as these services may or may not require significant human intervention. Further, customized service element is, in many cases, intricately interconnected with standard cloud computing services and cannot be bifurcated. Hence, there is a need to bring further clarity in the definition of Cloud Computing and Dual/ Bundled Services, as this could otherwise potentially trigger unintended applicability of Amount A for Indian IT service companies, including affiliates of Multi-National Enterprise (MNEs) that have Global Competency Centres.
3. Such Services where standardized cloud services only act as an enabler should be kept out of scope of Amount A.
4. The definitions included in Pillar 1, in relation to ADS and CFB, should be as comprehensive as possible to reduce complexity and uncertainty. Amount A should apply to all businesses in the same way, in all circumstances.
5. Para 184 of the blueprint suggests that all revenue other than those derived from domestic jurisdiction of Ultimate Parent Entity (UPE) of MNE will be considered as foreign source. This would lead to a contradictory result, leading to inclusion of several MNEs within scope of Amount A. Hence, it is suggested that revenue derived by any of the constituent entities of the MNE Group from customers of their domestic jurisdiction be considered as a domestic source revenue and outside the scope of Amount A.
6. De minimis foreign source in-scope revenue threshold be kept as a combination of relative term (i.e. % of group revenue) and absolute number. This will keep large MNEs, having significant business with domestic customers and paying appropriate taxes in the respective market jurisdiction under current taxation systems and having minimal foreign source in-scope revenue in terms of total group revenue, out of scope.
7. Market revenue threshold should contain a temporal requirement of more than one year, so that nexus will not be established on the basis of one-off transactions.
8. Hierarchy system not be implemented and the MNEs should be allowed to use any or a combination of revenue sourcing rules provided, as they deem appropriate.
9. Any revenue sourcing rule that is not based on the location of paying customers will require either very challenging tracking processes or subjective assessments, both of which will increase complexity and uncertainty. Including user IP location as part of sourcing rules creates unnecessary complexity as businesses generally do not collect this type of information.
10. We have highlighted that the segmentation required to compute Amount A will be different from the segmentation done for financial statements and would be an additional exercise for MNEs. Geographic segments will be more relevant for decentralized MNEs or MNEs which have high fluctuations in profit margins across geographies.

Key takeaways from our response submitted in relation to Pillar Two Blueprint are as follows:

1. The solution to address remaining BEPS challenges proposed under Pillar Two, is extremely complex, entails complete rewriting of international tax laws and contains complicated and un-familar computation mechanisms. Various measures suggested by OECD in BEPS Action Plan are yet to be implemented/have been recently introduced by countries and are in the preliminary stages (Principal Purpose Test,/ Simplified Limitation of Benefits, Country by Country Reporting, Multi-lateral Instruments (MLI) etc.). Accordingly,  the need for introduction of such provisions must be adequately evaluated. Such evaluation is not possible without understanding the impact of recently implemented BEPS measures.
2. Once implemented, sufficient carve out mechanisms would be required to mirror tax incentives as per domestic tax laws to ensure level playing field between local players and MNEs undertaking similar businesses.
3. Implementation of Undertaxed Payments Rule (UPTR) and  Subject to Tax Rule (STTR) requires significant amount of information. Such information may not be available during the financial year to which the income pertains. It would be almost impossible for the taxpayer to gather all the required information and recover STTR top-up tax in the form of withholding.
4. Pillar Two rules as currently drafted are quite complex and will require taxpayers and tax authorities to perform substantial amounts of additional work to facilitate compliance. One way to simplify the rules is to use existing business financial information, which will provide flexibility necessary to enable effective implementation. It could also be simplified if MNE businesses are only required to calculate one type of minimum tax regime and not multiple overlapping regimes.

Our detailed submission to OECD is attached for your reference.

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