Global Tax Deal Could Derail As US Pulls Plug, But India's Tax Kitty May Not Be Hit

The global tax deal, set up by the Organisation for Economic Co-operation and Development or the OECD, may be on the verge of derailment in Trump 2.0, but India's tax kitty wouldn't be hit by the development, according to an expert.

"The impact of the U.S. pulling out of the global tax deal would have a monumental impact on the global tax landscape, especially for the 50 countries/jurisdictions that have already adopted or formulated rules in their domestic law for implementing Global anti-Base Erosion (GloBE) rules... These jurisdictions will have to now undertake a course correction to adjust to the new realities," said Rakesh Nangia, Managing Partner at Nangia & Co LLP.

India, on the other hand, has always adopted a wait-and-watch policy on the adoption of GloBE rules and has yet to introduce any substantial legislative change in this direction.

"Further, in Union Budget 2024, India also abolished the 2% equalisation levy, which, being a unilateral action, was a bone of contention for the U.S. Thus, the U.S. pulling out of the global tax deal would not have much impact on India purely from a tax collection standpoint; however, this decision is going to severely impact the progress made thus far in reaching an international consensus and may potentially also force the OECD to go back to the drawing board," Nangia added.

In 2021, about 140 countries signed the OECD's global tax deal. The two-pillar solution aimed to address the “race to the bottom” approach of global tax competition and discourage cross-border tax avoidance by firms. Pillar 1 aimed to reallocate the residual profits of large multinationals from their home countries to jurisdictions where they generate revenue, and Pillar 2 establishes a 15% global minimum corporate tax.

Within hours of Trump taking the oath as President for the second time, the White House issued a memorandum stating that the Global Tax Deal will have no force or effect. Furthermore, the Secretary of the Treasury and the United States Trade Representative have been asked to investigate "extraterritorial or disproportionate" tax treaties that impact American companies adversely.