US Rejects Global Tax Deal: What’s Next for India’s Fiscal System?

Donald Trump's 'myopic' and 'selfish' exit from the agreement is a setback for India, writes Subhash Chandra Garg.

India is a prominent participant and signatory of the Global Tax Deal.

(Photo: Namita Chauhan/The Quint)

After a series of moves culminating in Donald Trump's Executive Order on 20 January 2025 pronouncing the “Global Tax Deal” to have “no force or effect” in the United States, the country walked out of the international tax agreement brokered by the economic thinktank Organisation of Economic Cooperation and Development (OECD) for industrialised countries.

The deal was meant to ensure that global profits of multinational companies are taxed at a minimum of 15 percent, and digital companies, in jurisdictions where they earn profits.

The 138 members of OECD/G-20 had approved the arcanely worded Global Tax Agreement in July 2023, which empowered the countries consuming global digital services to tax the profits earned in their jurisdictions by delivering such services without being physically present (Pillar A), and to subject the multinational enterprises with physical presence in their countries to a minimum 15 percent income tax on the profits earned in those jurisdictions.   

India is a prominent participant and signatory of the Global Tax Deal. The country has long suffered large loss of tax on digital services delivered by the non-resident companies.

In 2018, India began taxing Pillar A-type profits by implementing an ‘equalisation levy’ on digital services companies such as Netflix. India also faces from inadequate taxation of incomes due to ‘profit shifting and base erosion’, where companies move profits to jurisdictions with no or low tax rates.

Now, with the US' strike set to send the Global Tax Deal into a tailspin, how will India address this setback?

The Menace of Profit Shifting

The global community had evolved the rule of ‘permanent establishment’ to tax global companies operating in domestic jurisdictions. In India, permanent establishment is defined as a fixed place of business where the enterprise's business is wholly or partly carried on, thus indicating a business connection between the foreign company and its business in India.  

Such foreign companies, typically, industrial companies with a physical presence in India, are considered effectively residents in India for tax purposes, subject to filing income tax returns and paying their due income taxes. 

However, many such companies, in order to save taxes on profits, underprice their exports or overprice their imports, shifting their profits to countries with no taxation or little tax rates. Such practices, known as base erosion and profit shifting (BEPS), are widely prevalent and are being curbed by enacting transfer pricing rules. India has also established elaborate general and special tax avoidance rules to control this menace.

The Global Tax Deal sought to deal with this problem of whisking away profits to no or low tax jurisdictions by making every tax jurisdiction levy a minimum 15 percent tax on profits reported within their borders. The idea behind this Pillar B is simple: if the reported profits are subject to a minimum 15 percent income-tax everywhere, why would the multinational companies shift their profits at all?  

This emerging and evolving good global solution is jeopardised now, thanks to the utterly selfish and myopic move of the US.

The Challenge of Taxing Digital Companies

Digital companies, unlike traditional companies, do not require a physical presence or a permanent establishment in countries where they provide digital services, beamed from somewhere else in the world.

This special characteristic deprives domestic jurisdictions like India from taxing the profits these companies earn within their borders.

Along with a few others, India had sought to plug this loophole by introducing a new concept of ‘significant economic presence’ in 2018 to tax transactions carried out by the non-residents primarily by providing downloads of data or software in India by linking their profits to their Indian turnover. This became known as the ‘equalisation levy’. 

The Global Tax Deal was bringing new rules, building on the concept of significant economic presence, to more precisely define what might constitute the taxable profits of non-resident companies by linking profits to their user base, turnover, or other appropriate benchmarks, to impute profits from such digital services.

Like the minimum global tax of 15 percent, the US repudiation of the Global Tax Deal also puts the new emerging rules for taxation of digital companies’ profits into equal jeopardy.  

India’s Three Strategic Options 

Many countries have ratified the Global Tax Agreement and some have already legislated its provisions in their national laws.

Unless these countries reverse their laws post the US' repudiation, they would continue to have authority and responsibility to tax digital company profits and also determine whether the multilateral companies are paying minimum 15 percent tax on their global profits and if find it to be not the case, to recover the differential tax. This is not going to be easy, however, as they also remain bound with old tax treaties with the US.  

The OECD, of which the US is the most prominent member, has stated that it would continue to work with the US authorities to find a solution. However, such a possibility looks almost impossible in the current context.

The Global Tax Deal is dead as far as the US is concerned. The remaining members, or as many of them as are willing, may agree that the Global Tax Deal is good and binding between them. Or, they may also allow the Treaty to die a slow death. 

India has three options. 

• First, play along with OECD/G-20 and those who intend to remain in, to find a ‘plurilateral solution’ sans the US and then take appropriate actions accordingly.  

• Second, cosy up to the US, as it seems to be doing on tariff and other matters, and align its tax laws in line with the US laws. 

• Third, revisit its ‘permanent establishment’, ‘transfer pricing’ and ‘significant economic presence’ rules — borrowing from the Global Tax Deal — to make sure that physical companies pay tax at the rates India charges its domestic companies on their profits earned in India, and to determine the profits of digital companies reasonably and ensure that they pay income tax on their profits in a fair manner.

Strengthening and modernising of transfer pricing and general/special tax avoidance rules is the right option to capture the true profits of physical companies. However, due to the inherent challenge in determining arm’s length prices in any transfer pricing regime, India may also think of subjecting the foreign companies to a presumptive composite income tax regime linked to their domestic turnover.  

India had abolished its equivalisation levy for digital companies with effect from 1 August 2024. The most obvious option is to bring the equivalisation levy back in a reformed manner, using the principles agreed upon in the Global Tax Deal.  

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, We Also Make Policy, and Explanation and Commentary on Budget 2024-25'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)