FOLLOWING the OECD tentative recommendation in 2015 for countries not willing to wait for a consensus to be arrived to the effect that an equalisation levy may be levied in the interim, India was the first country off the block to come up with its EQ levy. Subsequently, many other countries including France, Italy, the UK followed suit with their own versions of digital service taxes. Since the primary target of the tax incidentally was the US companies, the then US administration agonising over the theory that the world has ganged up against it, threatened retaliatory trade sanctions. To cut a long story short, the USA later entered into agreements with these countries to the effect that the DST measures will be withdrawn once the OECD work comes to fruition and that the DSTs paid by its companies would be adjusted against the future demands or refunded. At the OECD level also the in-principle understanding is that once the Pillar 1 proposal of the OECD comes into effect, all the Digital Service Taxes that many jurisdictions have put in place in the interim will be given up. Thus, the moot issue is the quick finalisation of the OECD two pillar solution and it is here that the negotiations are proving intractable, particularly over the Pillar one blue print

The problem with the proposed Pillar 1 solution is that it does not adequately address the problems of the developing countries who have long opposed the present system and are likely to get a very negligible share of the residual profits of very big multinationals as proposed by the OECD. Besides, as has been pointed out time and again, the proposed solution as advocated by the OECD is overtly complicated and is again likely to generate gaps to be exploited by the MNCs and their advisors.

In this context, it is interesting to note some very recent observations emanating from the venerated EU. Replying to an exploratory opinion requested by the Czech Republic, the European Economic and Social Committee on digital taxation gave its opinion in July 2022 to reiterate that once an international agreement is reached on Pillar 1 regarding the reallocation of taxing rights, the corresponding rules should be swiftly implemented in the EU in coordination and simultaneous initiative with other major trading partners. In particular we may note the following observations that reinforce the points repeatedly highlighted in this column on many earlier occasions:

"The EESC encourages an international agreement on Pillar 1 aimed at achieving an effective taxation system, respectful of the neutrality and equal treatment principles, as well as to preserve the potential of innovation enshrined in the digital economy, on the one side, and to ensure that highly digitalised businesses contribute their fair share to national budgets, on the other side.

The EESC calls for an international agreement on Pillar 1 that refrains, as far as possible, from overly complex rules and is aimed at achieving transparency, predictability and administrative simplification keeping compliance costs low. An overcomplicated system could indeed create opportunities to circumvent the newly agreed rules, reducing their effectiveness."

As it is, the work of finding a just solution of sharing tax revenues of the MNCs in the markets around the globe has been wrongly usurped by the OECD. Despite some late efforts by letting the non-OECD third world countries to merely sit at the table and endorse its decisions, the OECD cannot look after the interests of the developing countries. We may note in this connection that the Finance Ministers of the Economic Commission for Africa have urged the UN to start negotiations on a tax convention to address the threat of global tax abuse.

In fact, in August 2022, the Secretary General of the United Nations, in his report to the General Assembly (A/77/304) titled - International coordination to combat illicit financial flows, has taken a not too subtle dig at the current status of the work being done at the OECD in respect of its two-pillar solution:

"40. OECD and the Group of 20 launched the Base Erosion and Profit Shifting Project in 2013, which concluded in 2015 with agreement on four minimum standards in the Action Plan on Base Erosion and Profit Shifting. In November 2016, countries concluded negotiations, held under the auspices of OECD, on a multilateral legal instrument to facilitate relevant modifications to tax treaties (e.g. introduction of anti-abuse provisions). As of June 2022, the multilateral legal instrument has been ratified in 73 Member States and five other jurisdictions, with only 1 least developed country in the group.

41. The 2015 OECD Action Plan on Base Erosion and Profit Shifting included an agreement to conduct further work on tax challenges arising from digitalization, through the OECD-housed Inclusive Framework on Base Erosion and Profit Shifting. Political agreement was reached on a two-pillar approach in October 2021. Pillar one addresses digitalization and globalization by making a limited departure from the arm's length principle for allocating taxing rights on corporate profits on a share of profits of the largest and most profitable multinational enterprises globally ; it would allocate a small share of profits to a market jurisdiction, regardless of whether the corporate group has a physical presence in the market. Pillar two includes global minimum corporate tax rules allowing countries to top up the tax paid on profit by a multinational enterprise to 15 per cent, either at the source through a minimum tax or in the jurisdiction of the enterprise's headquarters. Work is ongoing on both pillars. The exact revenue implications will be determined by multiple factors, including final carve-outs and exemptions; when and how widely the final agreement is implemented ; the extent of changes to tax rates and policies expected in countries; and how businesses and their professional advisors respond to the changes. While 120 Member States and 17 other jurisdictions signed on to the two-pillar statement in October 2021, it is not clear how many will ratify or implement the final agreement.

42. The Committee of Experts on International Cooperation in Tax Matters has also sought to develop solutions to the tax challenges arising from digitalization. In 2021, the Committee agreed to add a new article on the taxation of income from automated digital services to its model bilateral tax treaty. This new provision, article 12B, provides a bilateral solution to the taxation of digital business models that preserves the operation of domestic tax law in taxing digital services, regardless of whether the business has a physical presence in the country. The new article provides a simple and practical solution for developing countries to realize revenue from digital transactions, which previously were not generally subject to tax. To be effective, countries would need to have related domestic legislation and incorporate the new provisions into a tax treaty. The Committee has decided to look into the multilateralization of some United Nations Model Provisions to fast-track incorporation into existing bilateral treaties (see E/2022/45/Add.1). The Committee is now receiving expert input on the issues involved in multilateralization, including lessons from other similar experiences, for presentation of a paper during the next Committee session."

(Emphasis added)

As for legitimacy and acceptance of any proposed solution, it is important to note his observations:

"In General Assembly resolution 75/1, Member States expressed that there was no other global organization with the legitimacy, convening power and normative impact of the United Nations."

"All voices need to be heard and engaged in policymaking. Following on from the report of the Secretary-General entitled "Our Common Agenda," the United Nations system has prepared a detailed road map of the measures it can take to advance a more networked, inclusive and effective multilateralism. Yet, political leadership is needed to transform the patchwork of illicit financial flow-related voluntary forums and bilateral agreements into a universal, legitimate global system of laws, norms, standards and institutions that are consistent with the principles set out in the Charter of the United Nations. Over its 77 years of history, the convening power of the United Nations has been used to create binding international legal frameworks across its various workstreams, from peace and security to human rights, and most recently sustainable development."

(Emphasis added)

The observation of the Secretary General is thus in effect, a call to the UN system to assume the mantle of the leader in matters relating to transparency including in matters related to international taxation.

At this stage, we may have a stock-take of the OECD pillars. On the 14th of October, 2022, the OECD has released a report appropriately titled - Tax Challenges Arising from Digitalisation - Report on Pillar Two Blue Print. While this report gives the details of the blueprint for the Pillar two that will bring into existence a global minimum tax of 15% and having been endorsed by the USA and the EU, is of paramount importance to the developed world since they do not want to lose revenue to low -tax jurisdictions, it is the Pillar one that is of interest to the developing countries since this gives a wee bit of additional taxing right to the market countries. But, the progress of the work relating to Pillar one remains in limbo and the so -called progress report rehashes what is already known.

Thus, it is reiterated that there will be an allocation of a portion of residual profit of in-scope businesses to market/user jurisdictions ("Amount A") with thresholds apparently for the purpose of minimising compliance and administrative costs; that the said Amount A would be computed using consolidated financial accounts as the starting point with a limited number of book-to-tax adjustments and ensure that losses are appropriately considered. It has been mentioned that in determining the tax base, segmentation would be required to appropriately target the new taxing right in certain cases, but with broad safe-harbour or exemption rules from segmentation to reduce complexity and minimise burdens for tax administrations and taxpayers. The earlier insistence of compulsory arbitration faced stiff resistance from developing countries but will still involve steps containing effective means to eliminate double taxation in a multilateral setting. The consensus will be implemented through a new MLI to be developed.

As for amount B, that was relegated to the background but was of importance to the developing nations, it has been promised that the work on Amount B will be advanced, (a fixed rate of return on base-line marketing and distribution activities intended to approximate results determined under the arm's length principle) recognising its potentially significant benefits including for tax administrations with limited capacity as well as its challenges.

To quote from the latest OECD report "We will now focus on resolving the remaining political and technical issues, including issues around scope, quantum, the choice between mandatory and safe harbour implementation, and aspects of the new tax certainty procedures with respect to Amount A, and the scope and form of new and enhanced tax certainty procedures for issues beyond Amount A."

Pillar two would be implemented first. As is well known now, the Pillar 2 essentially consists of three elements- an income inclusion rule (IIR), an undertaxed payment rule (UPTR) and a subject to tax rule (STTR).

The Subject to Tax Rule (STTR) complements the IIR and UPTR. It is a treaty-based rule that specifically targets risks to source countries posed by BEPS structures relating to intragroup payments that take advantage of low nominal rates of taxation in the other contracting jurisdiction (that is, the jurisdiction of the payee). It allows the source jurisdiction to impose additional taxation on certain covered payments.

In simple words, the purpose of the STTR rules is that if a payment goes out from a source country and that payment does not suffer any taxation or suffers taxation at less than 15%, then the source country will get a right to tax the payment at the differential rate. Some existing tax treaties in fact contain such a rule. But the developed world is not much interested in implementing this in a hurry and therefore the convenient plea is that the IIR and the UTPR do not require changes to bilateral treaties and can be implemented by way of changes to domestic law whereas both the STTR can only be implemented through changes to existing bilateral tax treaties or through a separate multilateral treaty on the lines of the MLI. This would mean an MLI only for Pillar two whereunder the countries would commit themselves to implement the minimum tax proposal before the Pillar one proposal is finalised.

To understand the rest of the recent developments, it is important to remember that when the two-pillar solution was adopted by 134 nations/ jurisdictions, there were 4 hold out nations, Nigeria, Kenya, Sri Lanka, and Pakistan.

The Federal Inland Revenue Service of Nigeria has explained its decision not to endorse the OECD solution earlier. As has been widely reported, the Nigerian objection mainly centred around the very high threshold of 20 bn Euros group revenue for the in scope MNCs observing that most of the MNCs operating in Nigeria will not meet that threshold. Besides, the threshold had to be met in four consecutive years with the result that the MNCs that operate in Nigeria will not pay any tax under pillar one, making the situation worse for the country. Besides, in the event of a dispute between Nigeria and an MNE, Nigeria would be subject to an international arbitration panel. Concerns are that this process would cost Nigeria a lot more than the tax yield from such cases. Despite the hold outs by important African nations, OECD went ahead with its two-pillar solution, virtually isolating these countries.

Even for Pillar two minimum tax, there is no consensus. At the EU level, Hungary is holding out. Its current corporate tax rate is 9%, much below the minimum 15% proposed by Pillar 2. AT the EU level, such decisions have to be unanimous. As a result, the USA that had a long-standing treaty with Hungary from 1979 decided in July 2022 to terminate the said treaty on the ground that the said treaty was no longer beneficial to the USA. It has been widely reported that the action of the USA is to put pressure on Hungary to fall in line. The stalemate continues. Those, particularly from the developing world that have already agreed to implement the historic agreement for ending the race to the bottom in respect of corporate taxes, also have doubts about the actual practical benefit the new arrangement will bring to them.

In this background, some African nations have very adroitly utilised the need to stem illegal financial flows to include within its fold the rules of international taxation and it is difficult for any self-respecting country to object to the proposition. Thus it is that on the 23rd of November, the United Nations Second Committee (Economic and Financial) approved a resolution concerning "Promotion of inclusive and effective international tax cooperation at the United Nations" (document A/C.2/77/L.11/Rev.1), whereunder the General Assembly will decide to begin intergovernmental discussions in New York at United Nations Headquarters on ways to strengthen the inclusiveness and effectiveness of international tax cooperation, including the possibility of developing an international tax cooperation framework or instrument.

The resolution was moved by Nigeria on behalf of 54-member African Group of nations within the U.N. General Assembly and the main aspects of the resolution same as revised was as follows:

"The African Group urges countries to remain committed to the development of inclusive tax instruments at the United Nations and encourage the OECD to play a supporting role in this regard," the Nigerian representative said. The main part of the resolution after the usual preamble states as follows:

(The General Assembly)

"1. Recognizes the timeliness and importance of strengthening international tax cooperation to make it fully inclusive and more effective;

2. Decides to begin intergovernmental discussions in New York at United Nations Headquarters on ways to strengthen the inclusiveness and effectiveness of international tax cooperation through the evaluation of additional options, including the possibility of developing an international tax cooperation framework or instrument that is developed and agreed upon through a United Nations intergovernmental process, taking into full consideration existing international and multilateral arrangements ;

3. Requests the Secretary-General to prepare a report analysing all relevant international legal instruments, other documents and recommendations that address international tax cooperation, considering, inter alia, avoidance of double taxation model agreements and treaties, tax transparency and exchange of information agreements, mutual administrative assistance conventions, multilateral legal instruments, the work of the Committee of Experts on International Cooperation in Tax Matters, the work of the Organisation for Economic Co-operation and Development/Group of 20 Inclusive Framework on Base Erosion and Profit Shifting and other forms of international cooperation, as well as outlining potential next steps, such as the establishment of a Member State-led, open-ended ad hoc intergovernmental committee to recommend actions on the options for strengthening the inclusiveness and effectiveness of international tax cooperation ;

4. Also requests the Secretary-General, when preparing the report, to consult with Member States, the members of the Committee of Experts on International Cooperation in Tax Matters, the Platform for Collaboration on Tax, and other international institutions and relevant stakeholders;

5. Decides to consider the report at its seventy-eighth session and to include in the provisional agenda of its seventy-eighth session, under the item entitled "Macroeconomic policy questions", a sub-item entitled "Promotion of inclusive and effective international cooperation on tax matters at the United Nations".

(Emphasis added)

The USA moved an amendment to paragraph 2 as follows:

"Delete from operative paragraph 2: "including the possibility of developing an international tax cooperation framework or instrument that is developed and agreed upon through a United Nations intergovernmental process".

As explained in a press release from the UN, the US representative stated that calls for intergovernmental discussions of the matter were not in the spirit of an inclusive process to prejudge the outcomes of discussions. She was among several delegates who highlighted the Organization for Economic Cooperation and Development/Group of 20 two-pillar approach, which aims to reform international tax architecture. The representative of Japan expressed concern that the proposal in the draft may distract from and duplicate ongoing work in the two-pillar approach.

However, the representative of South Africa noted that developing countries have been calling for a global intergovernmental process to deal effectively with tax matters, calling on Member States to support the right to development by supporting the draft. Nigeria's delegate highlighted the importance of fully inclusive international tax cooperation, pointing out that African countries promoted this draft on the United Nations platform because it is a global organization.

Finally, the Nigerian text was approved by consensus after the Committee rejected the US proposed amendment to operative paragraph 2 of that text by a recorded vote of 55 in favour and 97 against, with 13 abstentions.

It has been reported by the Tax Justice Network that India and most of the developed countries supported the Nigerian proposal without any reservation while all the OECD countries also supported the proposal albeit with reservation. The Indian Revenue having enthusiastically participated in the OECD project has been ambivalent about the final outcome. After supporting the Nigerian resolution which does not totally dismiss the OECD two -pillar solution but puts a big question mark on its future, there is an urgent need for the Indian Revenue to make its stand clear.

We may recall that in the recently concluded TIOL Tax Congress, Technical Session 1, Mr. Michael Lennard of the UN refused to even the call the OECD Pillar one as a deal, preferring to call it a mere statement and he reiterated the complexity of the OECD solution. He suggested that countries should perhaps put more emphasis on withholding taxes or the DSTs.

That brings us back to the Equalisation levy and other DSTs. Now that the initiative is taken by the UN, it is perhaps more realistic to take an opposite view and make such DSTs and equalisation levies mainstream and make it a part of the regular tax treaty network instead of the hotchpotch of its being not an income tax and then making the provisions of the Income tax Act such as section 40(a) applicable in case of default.

It is heartening to note that developing countries have started to assert themselves. India has contributed to the development of the UN Model as well including the recent Article 12B. It should not surrender its leadership role amongst the developing countries by toeing the OECD line.