OECD's Two Pillar tax approach needs rework to gain acceptance

It must shed complexity and reflect true value creation in the source economy so that the Global South isn't disadvantaged

- V. ANANTHA NAGESWARAN, K. BALASUBRAMANIAN AND SMARAK SWAIN

The current global transfer pricing (TP) regime allows multi-national enterprises (MNE) to account for only a routine profit in a ‘market’ or ‘source’ jurisdiction for tax purposes and park a substantial portion of their super-profits in low tax jurisdictions (‘tax havens’) using ‘legitimate’ and ‘layered’ structures.

Over the last decade or so, the Organization for Economic Cooperation and Development (OECD)/G20 countries, under their base erosion and profit shifting (BEPS) project, have made a serious attempt to arrive at a framework to make the MNEs pay their fair share of taxes. During this decade, the digital economy also rapidly emerged as a mainstay business model, disrupting the global supply chain and mobility of resources. Globally, tax authorities endeavoured to adapt swiftly and stay in step with the evolving landscape. The OECD’s Two Pillar approach emerged as the favoured means for navigating this new reality. India joined the Inclusive Framework of OECD and voiced the views of the Global South in these discussions.

After many rounds of negotiations, the Two Pillars approach is on the brink of achieving a significant milestone in its journey. Pascal Saint-Amans, a former executive at OECD who spearheaded the project until last year, in his article in the Mint (11 May 2023), expressed hope that the negotiations would conclude under the Indian G20 presidency.