India cautious as US exits OECD’s Pillar-2 tax deal

The Trump administration’s withdrawal from the OECD’s global tax deal will affect international efforts to build consensus on a global minimum tax, but India remains unaffected. Around 50 of the 140 signatory countries, including several European nations, have implemented Pillar 2 so far, while India has not yet implemented these rules.

US President Donald Trump issued an executive order declaring the 15% global minimum corporate tax deal, known as the Pillar 2-GloBE Rules, as having “no force or effect” in the United States. This decision effectively withdraws the US from the ‘Organisation for Economic Cooperation and Development (OECD) led 2021’ global pact signed by around 140 countries. The deal mandates a 15% minimum Effective Tax Rate (ETR) for multinational enterprises (MNEs) with a global turnover exceeding € 750 million, aiming to curb profit shifting by such firms.

“This memorandum recaptures our nation’s sovereignty and economic competitiveness by clarifying that the global tax deal has no force or effect in the US,” the order said.

The withdrawal is expected to significantly disrupt the global tax landscape, particularly for countries that have already implemented or are preparing to adopt the Pillar 2 rules. Approximately 50 nations, including several European countries, have embraced these rules, while others, like India, have yet to implement them. The deal would allow governments to impose a “top-up tax” on MNEs reporting profits in low-tax jurisdictions to meet the 15% ETR threshold.

Trump’s order cites concerns that the global tax deal and other foreign tax practices are discriminatory and could subject US companies to retaliatory tax regimes. He has also instructed the US Treasury to explore protective measures against countries imposing disproportionate tax rules on American firms.

India, with an effective corporate tax rate of 25.17%, would not be directly affected by Pillar 2, as its rate already exceeds the global minimum. The new framework would enable the government to levy a “top-up tax” on multinational enterprises (MNEs) that artificially shift profits to low-tax jurisdictions.

According to an internal government analysis, India’s potential revenue gain from implementing Pillar 2 is estimated to be relatively modest, at around Rs 100-200 crore. However, this gain would only materialize under ‘specific conditions’.

The Trump administration’s decision to withdraw from the OECD’s global tax deal will not impact India directly but will significantly hinder the progress made toward achieving international consensus on a global minimum tax, according to experts.