What is 'Google Tax' or Diverted Profits Tax and the Singapore case?

Diverted Profits Tax, commonly known as "Google tax", refers to tax provisions designed to counter the practice of profits being diverted to other jurisdictions that have lower or zero tax rates

The Income Tax Appellate Tribunal (ITAT) has dismissed the I-T department’s appeal seeking disallowance from Google Singapore’s advertising system, AdWords, for not charging an equalisation levy, commonly known as Google tax, citing jurisdictional grounds.

What is Google Tax?

The Diverted Profits Tax, commonly known as “Google tax”, refers to tax provisions designed to counter the practice of profits or royalties being diverted to other jurisdictions that have lower or zero tax rates.

While Google is one of the most frequent practitioners of such diversions — and hence the tax’s informal nickname — the practice is quite prevalent across industry sectors. Profits are considered diverted when an entity pays only a negligible tax amount in, say, the United Kingdom by completing its transactions in the low-tax capital city of Dublin, Ireland, even though the revenue it generated in the UK is well within tax brackets.

Tech giants such as Meta, Apple and Amazon, as well as other MNCs like Starbucks etc, have allegedly been using such practices to lower their tax bills. Such entities derive large profits from their local user bases through online ads and in-app purchases even in countries where the firms might not have an employee base.

Earlier, companies could account for such revenues and earnings at a destination of their choice, and they often diverted it to low-cost jurisdictions.

The UK and Australia

The UK in its Finance Act 2015 imposes a levy on company profits — excluding those of small and medium-sized enterprises — that are routed via "contrived arrangements" to tax havens. The legislation also directs companies that determine that they are subject to the tax to notify Her Majesty's Revenue and Customs (HMRC) within three months after the end of the accounting period in question.

Australia also applied a similar tax provision in its 2015 Tax Laws Amendment (Combating Multinational Tax Avoidance) Act.

The Google Singapore Case

India’s ITAT, however, ruled against the I-T department’s appeal to disallow Google’s tax deduction, stating the transaction under scrutiny did not attract the levy since the advertisers and target audience were located abroad, and the revenue was paid to Google Singapore, which does not have a permanent establishment in India.

Even before the matter was addressed by ITAT, the commissioner of I-T (Appeals) had also ruled that the tax levy did not apply to the assessee, since they were neither an Indian resident with business or profession in India nor a non-resident with a permanent establishment in India.