India’s principle approach is akin to that of G7 countries, to target all businesses and not restrict to mere automated digital companies
Unless the G20/OECD expand coverage beyond 100 companies, the G7 proposal shall have limited impact on India-headquartered multinationals
Digital taxation of large tech companies has been a vexed issue across the globe, mainly because of the inability of centuries-old tax to keep pace with fast-evolving business models. Extensive use of technology has been the catalyst to disrupt the way conventional businesses are carried out.
Technology is the new intangible which has made businesses borderless, facilitating companies to operate without the need for physical presence and without movement of employees. The G20/OCED’s Base Erosion and Profit Shifting (BEPS) project has been a major step in this direction to revamp tax laws to address the impact arising out of the evolving business models.
While various milestones have been achieved in this global initiative, the area of digital tax however has been struggling to gather consensus among nations for nearly eight years.
After years of discussion, on June 5, 2021, the G7 countries (which includes the UK, the USA, Canada, Italy, Germany, Japan and France) finally managed to address the elephant in the room – the OECD’s inclusive framework Pillar 1 and 2 approach towards global digital tax.
A much-awaited common framework has now been proposed by global economic powers, except for China), wherein the top 100 global companies with turnover exceeding Euro 750 million would be shortlisted and taxation rights would be established between the home country (country of resident), and the source country (market jurisdiction).
For Pillar 1, the G7 consensus is to allocate 20% of residual global profit margins over 10% amongst the market jurisdiction, and for Pillar 2, a global minimum tax rate of “at least 15%” on a country-by-country basis has been proposed.
The teething anomaly here is that corporate tax rates of G7 countries are already above 15%, ranging from a low slab of 19% in the UK, to a high of 32% in France .
A parallel exercise was carried out by United Nations (UN) member countries, and the UN Committee of Experts on International Cooperation in Tax Matters recently released the final draft of Article 12B, which proposed a rather simplified approach to tax “automated digital service companies” i.e. tech giants.
The first option is similar to India’s Equalisation Levy ( EQL) with a base rate of 3-4% on the gross income, while the other option for a non-resident is to declare a limited PE in the market country and pay tax on net income, as per the applicable domestic tax rate – in India that will be 40% on a net income basis.
The big question is where does India stand on the issue? Being one of the largest consumer-based markets, India has made its position clear that it wants its fair share, through several moves such as, active participation in OECD’s BEPS project, being among the first non-OECD country to implement BEPS Action Point 1 in the form of unilateral digital tax – “Equalisation levy” – EQL , and later amending its domestic laws to widen taxing rights on non-resident companies, based on significant economic presence (‘SEP’).
India has adopted a more simplified approach from the beginning. In its early avatar for EQL 1.0, India targeted digital advertisement revenue beyond Rs 20 million earned by global giants via the withholding tax mechanism and taxed such revenue at 6% on a gross basis.
In the latter version, f with EQL 2.0, India introduced tax on “digital goods and digital services” which covers almost all transactions entered by qualified e-commerce operators or e-commerce suppliers, at the rate of 2% on a gross payment basis, an approach adopted as per UN model.
India recently notified the threshold to define SEP of non-resident companies in the country. The first threshold is payment exceeding Rs 20 million towards transactions pertaining to any goods, services, property, provision of download of data or software in India; the second threshold is 3 lakh users (0.3 million users) with whom systematic and continuous business activities are solicited by a non-resident or who are engaged in interaction with them.
While this may not significantly impact the taxes of tech biggies, its introduction during the current COVID-19 pandemic may be worrying.
The above measures clearly indicate that while India’s principle approach is akin to that of G7 countries, to target all businesses and not restrict to mere automated digital companies, however, the mechanism adopted is more like that of the UN approach and unlike the complicated profit allocation proposal suggested by OECD and G7 countries.
Further, the lower thresholds provided in both EQL, and SEP indicate India’s intention of having higher taxation share which may not align with the proposed thresholds suggested by the G7 countries.
It also needs to be mentioned that over a period of time and through a series of ongoing efforts by the Indian government, most global tech giants have opened physical offices in India, and due to localisation of majority of functions, the quantum of tax controversy has clearly reduced.
Unless the G20/OECD expand coverage beyond 100 companies, the G7 proposal shall have limited impact on India-headquartered multinationals.
Apart from a few big technology companies, most may not find a spot on the list. However, if G20/OECD retain the example of Pillar 1 blueprint published on October 12, 2020, a large number of Indian outbound businesses could be impacted as the export threshold is Euro 250 million (Rs 2,220 crore) compared to the global revenue turnover threshold of Euro 750 million (Rs 6,660 crore). Clearly, Indian companies would need to act proactively and carry out initial assessments wherever possible to get clarity on global profit shares.
Needless to say, we can expect rigorous negotiations among the G20 nations and about 140 odd OECD countries to address open issues such as the criteria for determining “largest and most profitable business”, defining “digital services Taxes” and “other relevant similar measures” before more clarity emerges on one of the long-standing global tax issues in recent times.
The good news is that finally a much-awaited consensus has been reached after many years of disagreement among global super economies, except China.
This will pave the way for acceptance by G20 nations (India being one of the members) and other countries who are signatories to the OECD Inclusive Framework.
The G7’s proposal clearly has its own merits and limitations and while we await the final outcome, it is imperative that every big company should carry out an impact analysis to assess the increased tax burden/loss of revenue, in light of the respective business model.
It is possible that some companies may lose, and some could benefit, but the overall objective is to attain clarity, transparency and certainty for big tech companies and for each country to receive its fair share of tax profits.
(Neeru Ahuja, Partner, Deloitte India.)