BEPS 2.0 SERIES PILLAR ONE – A PARADIGM SHIFT IN CONVENTIONAL TAX LAWS – PART II

1. PILLAR ONE - NEW TAXING RIGHT FOR MARKET JURISDICTIONS:

1.1 The digital revolution enables businesses to sell goods or provide services to customers in multiple countries, remotely, without establishing any form of physical presence (such as sales or distribution outlets) in market countries (i.e. country where customers are located). However, fundamental features of the current international income tax system, such as permanent establishment (PE) and the arm’s length principle (ALP), primarily rely on physical presence to allocate taxing right to market countries and hence, are obsolete and incapable to effectively tax digitalised economy (DE). In other words, in absence of physical presence, no allocation of income for taxation was possible for market countries, thereby resulting in deprivation of tax revenue in the fold of market jurisdictions.

1.2 To meet the complaints of market jurisdiction, Pillar One of BEPS 2.0 project aims to modify existing nexus and profit allocation rules such that a portion of super profits earned by large and highly profitable Multinational enterprise (MNE) group is re-allocated to market jurisdictions under a formulary approach (even if MNE group does not have any physical presence in such market jurisdictions), thereby expanding the taxing rights of market jurisdictions ov