Digital Tax: India may oppose Biden govt move to tax only top 100 cos

The latest proposal by Washington, shared with 130 countries, aims to tax only those entities with a global revenue of $20 bn and is not limited to digital players

India is likely to oppose the United States’ proposal of only taxing top 100 global companies as part of the multilateral deal under the OECD Base Erosion and Profit Shifting (BEPS) framework and may press for a wider coverage of the digital tax proposal.

Around 130 countries that make up the Inclusive Framework are striving to arrive at a consensus based solution by mid of the year to tax digital entities that end up not paying taxes in countries from where they earn income as traditional taxation rules require a physical presence. This will also ensure that countries withdraw unilateral measures like equalisation levy to tax digital companies such as Google, Facebook, Netflix, Adobe and Microsoft.

The grey areas

However, the latest proposal by Washington, shared with 130 countries, aims to tax only those entities with a global revenue of $20 billion and is not limited to only digital players. It has learnt to have proposed taking profits from all sources and allocating part of it to market jurisdictions in accordance to sales and not just those arising from digital service income or consumer facing income such as online search engines, social media platforms, online gaming, cloud computing services, digital advertising services, licensing or franchise arrangements, etc.

“The US proposal is being examined. But the Pillar 1 proposal is very limited in coverage. The idea was to evolve the traditional transfer pricing system of nexus and profit allocation that relies on physical presence. The US proposal does not address that. The idea is that if you are a digital company and deriving profits from India, irrespective of where you are based, you should pay taxes here. That is also the aim of equalisation levy,” said a government official.

The Inclusive Framework is working on a global deal on two pillars of BEPS. Pillar one deals with reworking international taxation rules to determine profit allocation and nexus to expand the taxing rights of market jurisdictions, which is where the user is located.  Pillar two aims to introduce a mechanism for worldwide minimum corporate taxation to reduce profit shifting to low tax jurisdiction. Under Pillar 2, the US has proposed a minimum global tax rate of 21 per cent.

Akhilesh Ranjan, former member, Central Board of Direct Taxes and currently advisor to PwC India, said that the US proposal will only end up covering a handful of global players, as against a broader coverage. “While it will cover all these internet giants, we did not talk of any global threshold. This will restrict revenues to India. India will have concerns on Pillar 1. We never talked about restricting it to just 100 companies. If we say top 100 companies, we are making a big assumption. So India is not getting much from Pillar 1 as far as the US proposal goes,” said Ranjan.

He, however, added that the proposal is somewhat closer to what New Delhi had recommended as, “we also did not distinguish based on the type of income under the significant economic presence.” He said that India first wanted significant economic presence to be defined and under that alternative nexus all these digital companies will come. “Whichever company satisfied the local criteria of sales, assets, employees, etc, there could be allocation of income,” he added.

India had proposed allocation of profits under fractional apportionment method, wherein, the entire profit of the group will be apportioned to different countries in which the group operates through a formula, taking into account factors like employees, assets, sales, and users.

Mukesh Butani, partner, BMR Legal said that India’s focus on digital tax has been to tax profits attributable to the market jurisdiction. “If the US proposal is targeting only the top 100 companies, I wonder how India’s appetite to tax digital income will be met with the recent proposals,” he said.

In February, the United States had dropped the Trump administration’s so called ‘safe harbour’ proposal to allow some companies opt out of new global digital tax rules. It would have allowed large players like Apple, Facebook, etc to opt out of the regime.

Washington is yet to come up with exact rules to determine applicability of the US proposal.

Rakesh Nangia, managing partner, Nangia Andersen LLP’s pointed out that the companies headquartered in the US constitute approximately half of the most profitable digital companies. “The proposal, if accepted globally, would make compliance simpler for US giants and preclude them from applicability of unilateral digital service taxes worldwide, which they believe to be discriminatory’ against US companies,” he said.

The Biden administration has threatened India with retaliatory tariffs over the  equalisation levy of up to 25 per cent on a slew of Indian products including shrimps, basmati rice, gold, among others over the 2 per cent equalisation levy on ecommerce operators introduced in April 2020 with a turnover of Rs 2 crore. It covers players including Adobe, Uber, Udemy, Zoom.us, Expedia, Alibaba, Ikea, LinkedIn, Spotify, and eBay. In fact, India  further expanded its scope by way of clarifications in the Finance Act 2021-22, which will cover e-commerce supply or service when any activity, including acceptance of the offer for sale, placing the purchase order, acceptance of the purchase order, supply of goods or provision of services, partly or wholly payment of consideration, takes place online. The levy only applied only to digital advertising services till 2019-20 at the rate of 6 per cent.

India's collection from equalisation levy nearly doubled to Rs 2035 crore in 2020-21 from Rs 1,138 crore in the previous year.

Nangia added that while the US hopes to bring stability and certainty with respect to taxation of US giants, the focus on mere 100 companies all over the world would be unfair for source countries. “India might oppose the new proposal, as India seeks to tax all companies that have a tax nexus with India, i.e. companies that sell products/ services in India above a specified threshold and companies that solicit business activities systematically and continuously in India or interact with users in India exceeding a prescribed number,” he added.

Amit Maheshwari, Partner, AKM Global concurred with the view and said that it would be better if there is a monetary threshold instead of restricting it to top 100 companies. “The good thing is at least US has come to the negotiating table and if US becomes part of the discussion, there is a good chance of reaching a consensus and get rid of these unilateral levies by various countries including India,” said Maheshwari.

The OECD has estimated revenue losses due to base erosion and profit shifting an equivalent to 10 percent of global corporate tax revenues, and created the Inclusive Forum to collaborate on the implementation of BEPS framework.

India has pitched revision in profit allocation and nexus rules through significant economic presence, giving more taxing rights to jurisdiction and widening of the definition of nexus,  arguing that permanent establishment should not only require a fixed place of business.