Under the Base Erosion and Profit Shifting (BEPS) framework, large economies, barring the US, have come together to tax the global income of digital companies. India wants companies to discuss issues if any that they could face under the OECD’s so-called Pillar-1 and Pillar-2 approaches.
The Pillar-1 approach includes how digital companies allocate profits and which countries have the first right to tax them. Pillar 2 proposes a mechanism that would determine how to calculate the amount of taxes each jurisdiction can charge from the total profit pool.
Large digital companies are under the scanner for escaping tax in several countries through complex holding structures.
“Most multinationals are planning to make their presentations directly to the OECD, as they want the current system to continue,” said a person with direct knowledge of the matter. Most of them are staying away from the Indian government because of this, he added.
The OECD had been trying to bring large economies on one page under the BEPS framework. ET on October 13 wrote that Google, Facebook, Amazon, LinkedIn and Netflix could face larger domestic tax liability after the OECD postponed a common tax framework for global economies, a move that would allow countries like India to go ahead with their own plans to tax the digital giants.
Tax experts also point out that some of the smaller companies or startups that may be valued in billions but may not have a particular level of revenues may escape the tax net.
“Whether a particular activity will fall in scope of Pillar One will be dependent upon the quantum of threshold of revenue. If the various thresholds are set at the higher end of the spectrum (which seems to be a possibility) then, a sizeable number of small or mid-size e-commerce companies may be left out. This may make difficult for India to phase out equalization levy in entirety,” said Amit Singhania, a partner at Shardul Amarchand Mangaldas.
The OECD was expected to come out with a common tax framework by December this year, but now it is expected to do so mid-next year. The US has already threatened reciprocal treatment of any economy that attempts to tax US-based digital giants. The US in June has already launched an investigation on how some of the countries including India were taxing companies such as Google, Twitter and Facebook.
India in 2018 had said that global digital companies had a large consumer base in India but did not pay enough tax here.
There is a global push to bring the digital giants under the ambit of local taxes. Many such companies deliberately base themselves in low-tax jurisdictions.
India has come up with a framework, whereby it can tax global giants taking their user base into consideration, a move objected by the US.
The issue, say industry trackers, is worth $100 billion. Most of the large digital companies have created a maze of companies across the world as part of their tax planning. This also means they don’t pay domestic taxes in several jurisdictions as per the liking of the local governments.
Take India for instance, government officials say digital giants earn as much as Rs 25,000 crore from India a year but do not pay tax here on the entire amount.
In most cases, these companies have created domestic units that only charge “fees” or “commissions” and the domestic tax (30%) is paid only on this portion of the amount.
To circumvent this, the Indian government has introduced an equalisation levy — 6% on advertising revenue and 2% on online purchases — on digital transactions.
According to people in the know, the concern among digital companies is that they might face tax in different jurisdictions for the same profits.