Countries around the world, including India, will get more power to tax big multinationals such as Google, Apple and Facebook doing business within their borders under a proposed overhaul of decades-old rules. The Organisation for Economic Co-operation and Development (OECD) has proposed to expand government rights to tax multinationals, especially big internet firms, by releasing a methodology for such taxation.
The development is a shot in the arm for India which has proposed its own regulations on taxation of digital companies. “With the OECD report also supporting the right to tax, one would now have to see if and when the CBDT (Central Board of Direct Taxes) finalises the profit attribution rules. This together with the significant economic presence (SEP) amendment could impact several digital companies operating in India,” said Ajay Rotti, partner at Dhruva Advisors.
The move implies digital companies around the world will have to pay more tax, though the quantum in India is yet to be decided. The government has already come out with an SEP framework whereby it can tax digital companies in India even if they don’t have a permanent establishment. This essentially means that companies which do not have even a single employee or office in India too can be taxed. A few months back, CBDT had come out with its own rules on how to go about taxing multinationals in India. These, as of now, are proposals and will have to be notified to become a law, said tax experts.
Companies such as Facebook, Google, Twitter, LinkedIn and Airbnb have reached out to tax experts, seeking an opinion on the OECD proposals and its impact on their India revenues.
‘Greater Tax Certainty’
According to a senior lawyer present during one such conference call late Wednesday evening, the global firms are looking to either create domestic companies or relocate employees outside India.
“Up till now, tax treaties would override any other domestic law but the way the developments are happening, India would be able to tax sales generated domestically,” the lawyer said. “Now the tax department can take the role of India employees, sales, consumer base and other factors into account, apart from tax treaties to determine permanent establishment.” This would eventually mean additional taxes. Permanent establishment is a concept in taxation that determines the jurisdiction in which taxes will have to be paid.
The OECD expects the first sign of whether there is broad political support for its proposals next week when G20 finance ministers discuss them at a meeting in Washington.
The overhaul would have an impact of a few percentage points of corporate income tax in many countries with no big losers apart from big international investment hubs, OECD head of taxation policy Pascal Saint-Amans said.
While that means countries like Ireland or offshore tax havens could suffer, countries with big consumer markets like the United States or France would benefit from the shakeup.
The proposals in the consultation paper of OECD create a new nexus rule (largely dependent on sales) that would not depend on physical presence in the user/market jurisdiction. Also, the proposals go beyond the arm’s-length principle for allocation of profits by using formulae-based apportionment, say tax experts.
“The unified approach also seeks to deliver greater tax certainty for both taxpayers and administrators by suggesting a three-tier profit allocation mechanism. India’s draft report on profit attribution gives weightage to sales and users,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
“India was always free to tax these companies. But in this current economic slowdown, the OECD proposal may enable the government to bring a new tax regime by which digital companies may be taxed,” said advocate Virag Gupta, author of the book ‘Taxing Internet Giants’.
The government said last year that global digital companies have a large consumer base in India but don’t pay enough taxes domestically. There is a global push to bring these digital giants under the ambit of local taxes. Many such companies deliberately base themselves in low-tax jurisdictions like Ireland. “We need to quantify transactions between companies and their clients or their parent along with the number of consumers,” said a government official. “This is a complex subject and we have to be mindful not to catch smaller players and keep the focus on large fish,” he added.
France adopted its own national tax on digital companies this year, sparking US threats of tariff on French wine and adding to global trade tensions. Meanwhile, companies are facing increased uncertainty about their tax bills as countries challenge arrangements to pay tax in countries like Ireland rather than where their markets are. Apple is locked in an EU tax dispute over profits booked in Ireland which could cost the iPhone maker $14 billion. Meanwhile, Google agreed last month to pay more more than $1 billion to settle a tax case in France. Amazon, which has been asked by the EU to pay about 250 million euros in back taxes to Luxembourg, said the OECD proposals were an “important step forward”.
Source : Economic Times