Google, Facebook made Rs 10,000 crore; paid Rs 200 crore as tax in India

Modi government plans to bring companies that derive revenues from Indian users but pay taxes elsewhere into the corporate tax net

With many nations across the world planning to tax digital companies that derive significant revenues from their citizens but pay taxes elsewhere, the Modi government is laying the ground for India’s own digital tax. Amendments to Section 9 of the Income Tax Act introduced in the Finance Bill, 2018, which came into effect from April 1 this year, could result in the biggest technology companies of the world operating in India coughing up more taxes than they do currently.. In addition, the Modi 2.0 Cabinet has also ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This will allow modification of India’s bilateral tax treaties with various nations to “curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.”

Facebook's case

While this will have an impact on a variety of firms, one of the most impacted will be the world's biggest technology companies — particularly Google and Facebook. Business Standard reviewed regulatory filings of Facebook and Google across international jurisdictions and found that while both companies had millions of users and economic activities in India, their revenue arrangements with holding and parent companies resulted in tax payments which weren’t exactly commensurate with the scale of their operations in India. In 2017-18, the Indian operations of these two companies reported total revenues of almost Rs 9,800 crore ($1.4 billion). Their tax payments were around Rs 240 crore ($38 million) primarily on income. In the US, before the Donald Trump administration slashed corporation tax rates from 35 per cent to 21 per cent in December 2017, these companies were effectively paying much higher taxes. In 2015-16, Facebook and Alphabet paid taxes at 18 per cent and 19 per cent, respectively, to the US government. In 2017-18, Facebook’s effective tax rate was 13 per cent. Google’s parent company, Alphabet Inc, estimated its effective tax rates to be 12 per cent in the US.

In India, these companies aren’t subject to the corporation tax of 40 per cent that foreign companies have to pay, but advertisers who pay companies like Google and Facebook are charged a withholding tax of six per cent. The withholding tax was introduced by the Modi government in 2016. Under Section 9 of the Income Tax Act, there was a certain degree of ambiguity about the incomes of these companies. For the purpose of taxation, it defined income of a business whose whole set of operations are not carried on in India as “the income reasonably attributable to the operations carried out in India.” Since the Indian operations of these companies act as re-sellers of their parent companies’ services, these revenues reported in India are not reflective of the actual advertisement revenues earned from users in India.

In Facebook’s case, a look at its annual accounts shows that all revenues of its Indian operations are shown as coming from the US despite Facebook having almost 300 million users in the country — higher than even the US. Between 2014 and 2018, Facebook India reported total revenues of Rs 1,261 crore ($180 million) in India — 99 per cent of which was paid to it by its US-based parent company Facebook Inc for “rendering of services”. The rest of the money was received by its US subsidiary Whatsapp Inc. Facebook India has classified all these earnings from its US-based mother ship as “export revenue services” with most of it received in foreign exchange. Despite having the most number of users in India, the revenue received by Facebook India from its US parent company was just 0.1 per cent of its global revenues. The holding company and largest shareholder of Facebook India Online Services — the Indian arm of the social media behemoth — is a Singapore-based company called Facebook Singapore PTE. But Facebook India barely made or received any money from its Singapore-based holding company with most of the money for “rendering services” over the years received from its US-based parent company.

Google's case

Google India’s relations and transactions with its subsidiaries, holding and parent companies are different from Facebook's. Google India’s parent company is Alphabet Inc. But its holding company is Google International LLC, which is registered in the US. In 2017-18, Google India reported revenues of Rs 9,231 crore ($1.3 billion), of which Rs 6,390 crore ($916 million) was classified as domestic revenues earned. The rest was classified as export services revenue. A more intriguing aspect of Google India’s financials is its expenditure. It incurred an expenditure Rs 8,711 crore ($1.2 billion). Google India’s payments to its US-based holding company and other overseas subsidiaries — classified as expenses incurred — accounted for almost Rs 7,400 crore ($1.1 billion). More than 90 per cent of Google India’s payments were in effect revenues for its own companies in other jurisdictions. Of these payments, Google India paid its Singapore-based subsidiary, Google Asia Pacific PTE, Rs 6,334 crore ($908 million) primarily for “purchase of services related to advertisement space.”

In 2016-17, Google India had paid its Singapore subsidiary Rs 4,367 crore ($626 million). Prior to this period, the bulk of Google India’s overseas payments for expenses was being made to its Irish subsidiary Google Ireland Limited. In 2015-16, Google India paid Google Ireland Rs 3,581 crore ($513 million) and Rs 2,330 crore ($334 million) was paid as expenses for ‘purchase of goods’ the previous year. Such payments have also landed Google in legal trouble in India. The income-tax department had found that Google India had been making such payments to its Irish subsidiary without paying tax in India. The I-T department concluded that Google India had to pay tax on such payments as they constituted “royalty”. Google India challenged the demand by invoking clauses of the India-Ireland Double Taxation Avoidance Agreement (DTAA) that stated that tax on royalty was “payable only on receipt.’

Google further stated that it had already paid taxes to the Irish government on the money Google India had paid it and it wasn’t liable to pay another tax in India. It also stated that Google Ireland was the owner of Google Adwords and Google India was just selling the service in India and paying its Irish subsidiary (the original owner) for using its services. In May 2018, Google India’s appeals were rejected by ITAT and the company has challenged the order in a high court. Ireland has one of the lowest corporation tax rates in the world, with companies taxed at a rate of 12.5 per cent. Corporation taxes on foreign companies in India can go up to 40 per cent.

Corporate filings show that Google India has been stuck in litigation, with tax authorities demanding Rs 429 crore ($61 million) on its income earned from 2004-05 to 2016-17. Google has paid Rs 147 crore ($21 million) “under protest” while still challenging the tax demands in courts and appellate tribunals in India. It remains unclear whether the recent payments which are being made to its Singapore subsidiary would also fall in the category of ‘royalty’. According to Google, the contracting entity of its Adwords programme — its chief money spinner — for Indian residents was its Singapore subsidiary, Google Asia Pacific PTE. Corporation tax rate in Singapore is 17 per cent, almost half that in India.

Business Standard sent a list of questions to Google and Facebook but had not received a response till the time of publication.

India's plan to tax big guns

In the Finance Bill 2018, former finance minister Arun Jaitley, sought to expand the scope of what constitutes income accrued in India by amending Section 9 of the Income Tax Act — a move that could have implications not just for Facebook and Google but other technology companies like Amazon, Uber and Twitter. The clause which came into effect on April 1, 2019 now defines significant economic presence as “transaction in respect of any goods, services or property carried out by a non-resident in India, including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed”. Secondly, it also includes “systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means”, while defining those with a significant economic presence in the country.

In addition to Facebook users, other platforms operated by the company, such as WhatsApp and Instagram, are estimated to have over 200 million and 60 million active users, respectively. In effect more than half of India’s 1.3 billion population is on some or the other platform operated by Facebook. In 2017-18, Facebook India paid Rs 20 crore ($3 million) as taxes. Google’s various services have millions of users in India. Reports suggest its Android operating system are used by 90 per cent of Indian smartphone users. YouTube has almost 250 million monthly active users in India alone. Google Maps is used universally for navigation services in India by users and cab aggregators. Google Tez (now renamed Google Pay), its payments application, is reported have 22 million Indian users within a year of its launch.

“As such there is no corporation tax on digital companies in India. There is the equalisation levy or the withholding tax of six per cent. But it is not an income tax and is not creditable in the home country of digital companies. Even though the amendment to Section 9 of the Income Tax Act now includes bringing companies with significant economic presence in the tax net, there is still a long way to go before digital companies can be taxed. Since India has DTAAs with nations where these companies pay most of the tax on their profits, these individual agreements would have to be amended before India can start taxing companies like Facebook, Google and others,” said Amit Maheshwari, managing partner at Ashok Maheshwary & Associates

How other nations tax digital companies

While the Modi government will initiate the process of amending DTAAs, including the one with the US where most of these companies have a significant physical presence, the process is unlikely to be accomplished soon. But many nations across the world have started imposing taxes on digital revenues of such companies even as they work towards a global consensus on the issue. The European Union (EU) has mooted a digital service tax (DST) of three per cent from 2020. This would apply on revenues digital entities derive from users by selling online advertising, digital intermediary services and sale of user data. Italy has already announced a DST in its 2019 Budget. Singapore has plans to introduce a Goods and Services Tax (GST) on digital services provided to its citizens by any company. The United Kingdom (UK) introduced a DST of two per cent on revenues. This comes into effect from 2020 and will include digital companies that earn money from British citizens through search engines, social media platforms and online market places.

Note: All currency conversions have been done on the basis of Rupee-dollar exchange rate on June 17, 2019.