Taxing global tech giants: Countries like India lose out on a significant revenue base because of complex business and corporate structures, and international treaty obligations.
The advent of the internet has thrown up newer challenges to taxmen who find it difficult to impose levies on global technology companies operating in India. The complexities of businesses, as well as corporate structures, form a major obstacle for the Narendra Modi government’s efforts to bring these companies under the tax net. But the largest issue facing taxmen in India is the existence of multiple international tax treaties. Finance minister Nirmala Sitharaman had raised this issue at G20 meeting held in Japan last month. Financial Express Online’s Krishnanand Tripathi spoke to Sameer Jain, Managing Partner, PSL Advocates and Solicitors, a law firm based in New Delhi. Edited excerpts.
Q. What international norms guide taxation of global tech giants serving customers in India?
A: The concept of ‘Permanent Establishment’ as provided under the Organisation for Economic Co-operation and Development, Model Tax Convention on Income and Capital, guides taxation of internet and digital technology firms registered in a foreign country serving customers in India. The country in which the firm has its permanent establishment taxes the firm in accordance with its domestics laws. However, the same would be subject to the bilateral or multilateral treaties entered into by the host country.
A: India has adopted the concept of Significant Economic Presence (‘SEP’) to establish a business connection so as to effectively tax these digital empires. Under the concept of Significant Economic Presence, a foreign company will be deemed to have a business connection in India if the business generated in India crosses a threshold amount or number of users, however, the threshold is yet to be prescribed.
Q: To what extent profit attribution to their India operation is a challenge for the government?
A: It is one of important issues: how to determine and attribute profit to India operations of these technology firms, i.e. the profit that is earned from activities in India. In the case of subscription-based services, the answer is simple, one can tax the amount generated by way of subscription fee received from India.
The difficulty is in calculating the amount liable for taxation arises in non-subscription based models, where income is earned from other sources such as targeted consumer advertisements that depend on algorithms and user-specific metadata. There seems to be no global consensus on how the same is to be determined and taxed.
Q: Whether imposing an equalisation levy is the way forward?
A: Through the Finance Bill, 2016, India introduced an unilateral measure in the form of an equalisation levy, which falls outside the scope of India’s treaty obligation. Equalisation levy is charged on the sale of online advertisement space by a foreign company, not having a permanent establishment in India, to an Indian resident. The levy is currently imposed at the rate of 6% on the transaction value and is required to be withheld by the service recipient in India.
Q. What are other hurdles in imposing and collecting taxes from these internet giants?
A: As taxing foreign companies involves application of international treaties, that overrides application of the domestic law, the restrictive definition of Permanent Establishment in such double tax avoidance treaties (DTAAs) override the amended definition of Business Connection that includes the concept of Significant Economic Presence (SEP). Due to this anomaly between the domestic law and international treaties, India continues to tax foreign digital companies under the restrictive and old definition of Permanent Establishment. For India to effectively tax business under the concept of Significant Economic Presence (SEP), it needs to amend its existing Double Taxation Avoidance Treaties to provide for the concept of SEP.
Another issue that needs to be tackled by India, in due course of time, will be how to ascertain the value created by digital economies, profit attribution and characterization of income.