Navigating Cross-border Tax Challenges- A Dialogue With Rakesh Nangia

The international tax landscape faces multiple challenges in light of rapid evolution of the global economy, technological advancements/ digitization, and the shifting political climate.

The BEPS project by OECD resulted in a series of measures intended to be implemented by countries worldwide. The agreement on a global minimum tax (GMT) aims to reduce profit shifting and tax competition amongst the countries. Ensuring compliance and effective implementation of such a tax is a considerable challenge due to the need for global consensus and domestic law changes.

In conversation with Rakesh Nangia, Managing Partner, Nangia & Co LLP, we delved into the detailed discussion on Cross-border Tax Challenges and the way forward.

Question: What is your take on GMT and its impact on developing countries?

Rakesh Nangia: With a minimum effective tax rate of 15%, the move is expected to raise up to US$ 200 bn in additional revenue annually. This includes not only the revenues expected from the application of the rules themselves, but also additional corporate income tax revenues expected from the resulting reduction in profit shifting activity as a consequence of introducing the rules. A jurisdictional effective tax rate of 15% is a big step up from the historically (often very) low rates on foreign source income of MNEs.

The framework acknowledges the ask from developing countries for more transparent, mechanical, predictable rules to level the playing field and reduce the incentive for MNEs to shift profits out of developing countries. The rules are expected to reduce pressure on governments to offer wasteful tax incentives and tax holidays, while still providing a carve-out for certain income that arises from real substance. In addition to this, developing countries are expected to be able to further protect their tax base through the application of a treaty based Subject to Tax Rule (STTR) which will allow countries to retain their taxing right, which they may have otherwise ceded under a tax treaty, on certain payments made to related parties abroad which often pose BEPS risks, such as interest and royalties.

Are countries under the Inclusive Framework mandatorily required to adopt the GMT rules? What happens if they don't?

Rakesh Nangia :The rules are not mandatory but have been agreed as a “common approach.” This means that jurisdictions are not required to adopt the rules, but if they choose to do so, they agree to implement and administer them in a way that is consistent with the agreed outcomes set out under those rules. Even if they do not implement the rules, agreement on a common approach means that one jurisdiction accepts the application of the rules by another in respect of MNEs operating in its jurisdiction.

We are witnessing enhanced reporting requirements, such as Country-by-Country Reporting (CbCR) and other transparency measures that are crucial for preventing tax evasion and avoidance but increase compliance and administrative burdens on both tax administrations and businesses. The standards for reporting crypto assets/currency (cryptos) and real estate transactions are gaining importance given the potential tax leakages and varied regulations.

What are the latest developments on the regulatory and reporting front on cryptos? What are the related challenges?

Rakesh Nangia: Recently, the OECD has released a publication highlighting the reporting framework for crypto-assets. In light of the specific features of the Crypto-Asset market, the OECD, working with G20 countries, has developed the Crypto Assets Reporting Framework (CARF), a dedicated global tax transparency framework which provides for the automatic exchange of tax information on transactions in Crypto-Assets in a standardized manner with the jurisdictions of residence of taxpayers on an annual basis.

The CARF consists of rules and commentary that can be transposed into domestic law to collect information from Reporting Crypto-Asset Service Providers with a relevant nexus to the jurisdiction implementing the CARF. These rules and commentary have been designed around four key building blocks: i) the scope of Crypto-Assets to be covered; ii) the Entities and individuals subject to data collection and reporting requirements; iii) the transactions subject to reporting, as well as the information to be reported in respect of such transactions; and iv) the due diligence procedures to identify Crypto-Asset Users and Controlling Persons and to determine the relevant tax jurisdictions for reporting and exchange purposes.

Work is ongoing on an implementation package to ensure the consistent domestic and international application and effective implementation of the CARF. The implementation package will consist of a framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF, IT-solutions to support the exchange of information and a further elaboration of the requirements set out in Section V of the CARF. Similarly, work will also progress to put in place the appropriate mechanisms to automatically exchange information pursuant to the amended CRS. Finally, coordinated implementation timelines for both the CARF and amended CRS will be agreed.

On real-estate, what is the trend of cross-border holdings? Is it being regulated? Are there any global reporting obligations being assigned to the jurisdictions?

Rakesh Nangia: Several studies show that cross-border real estate holdings are on the rise. However, tax authorities often lack visibility into tax relevant aspects of foreign real estate holdings of their residents and there are indications that this raises tax compliance risks. In addition, aspects of the real estate sector have been identified as a risk area by the Financial Action Task Force (FATF). At the same time much progress has been made in recent years in improving tax transparency on financial assets held abroad.

It is against this background that the Indian G20 Presidency invited the OECD to prepare a report that looks into current level of tax transparency on foreign owned real estate and explores how recent improvements in other tax transparency frameworks and wider developments could inform possible improvements to tax transparency in the area of real estate on a voluntary basis.

The OECD report to G20 presidency addresses the potential tax compliance risks in the area of foreign real estate holdings and the benefits of enhanced tax transparency in this area and second sets out the key domestic and international features for a successful tax transparency framework. It also identifies potential improvements to the present architecture. The report suggests that, in the short term, interested countries could make significant progress at limited cost by exchanging information that is readily available on the basis of existing international legal and operational gateways for the exchange of information. The report also explores two models for longer-term structural improvements to tax transparency. The first is based on the traditional exchange of information approach, underpinned by common due diligence and reporting rules. The second is based on a more novel direct access-based model, building on the ongoing trend, in particular in the anti-money laundering and financial regulatory space, towards the interconnection of digitalised ownership registers accessible to designated relevant government agencies on a real-time basis.

The above developments and challenges highlight the dynamic nature of international taxation and the need for ongoing cooperation and dialogue among nations, businesses, and other stakeholders to create a fair, efficient, and transparent global tax system.

These issues are under constant discussion and negotiation at various levels, including multinational forums, bilateral relations, and domestic legislation. The outcome of these discussions will shape the international tax landscape for years to come.