No consensus on India's concerns over taxing digital firms at OECD meet

No consensus was reached on certain apprehensions raised by India over taxing digital companies at the Organisation of Economic Cooperation and Development (OECD) meet in Paris last week.
 

This could result in missing the January 2020 deadline set by global peers to finalise structure of the new digital tax on companies like Google, Netflix, Amazon, Facebook and Uber.
 

India is learnt to have raised the three key issues in Paris. These were not being addressed in the draft paper released by OECD, which aligns 134 countries, including India.
 

In the 21-page draft, the OECD, on October 9, had put out three different tax formulas, seeking public feedback.

During the meeting, certain issues raised by India include scope of business, based on which tax would be levied.
 

They also include threshold for revenue generated globally as well as their jurisdiction and how to create nexus by creating a concept of “virtual company” in case of no permanent establishment.
 

These apart, India also discussed the “deemed residual profit” or non-routine income of the digital firms attributable to marketing intangibles.
 

On the scope of business, developed nations want India and other developing countries to tax only consumer-facing businesses which provide services directly to the end user.
 

This means to keep out those that sell business-to business, such as industrial goods and professional services companies.
 

However, India is not in favour of taxing just one vertical of the business and not the whole. “We have made our stance clear as these digital firms are into both B2B and B2C. Covering just one vertical would narrow down the whole scope. Also, this will not give the fair share of revenue,” said an official, who represented India at the task force meeting in Paris.
 

The OECD proposal seeks to cover highly digital business models. It said that possible carve-outs would also be considered, in particular, for extractive industries or financial services. In addition, size limitations (eg a EUR 750 million revenue threshold) could be considered.
 

Another contention was raised over the new nexus through a new standalone rule allocating taxing rights over the additional income.
 

This could be done by creating a virtual company in India irrespective of whether the business has a taxable presence in the jurisdictions that meet the current nexus threshold.
 

Under the current international tax rules, “nexus” implies that a company has a sufficient economic relationship with a certain jurisdiction for that jurisdiction to be able to tax this particular company.
 

To streamline the implementation, India has proposed to introduce the definition of “virtual presence” for those who do not have physical establishments in their resident country.
 

Moreover, India also discussed the distribution of residual profits that would approximate the value of users of each country and the respective demand of the product.
 

Besides, the official says that the contention was also on deciding threshold on two-level tax: one which a company generates globally and one from its own jurisdiction.  
 

The OECD inclusive framework will meet in December where India would present the case.
 

In case of no resolution for certain aspects, the January deadline of deciding the blueprint of the tax could be delayed, indicated the official.
 

The OECD draft pitches for a unified approach by all the nations in January 2020 and the final proposals should be ready for the G20 meeting in Riyadh in November 2020.

Govt’s stand on digital taxation

• OECD draft suggests revenue model focussing on consumer-centric businesses
• India not in favour of carve-outs, proposes tax on all verticals offered by digital firms 
• Distribution of deemed residual profit largely based on sales and demand 
• Threshold to be decided on revenue generated globally or within jurisdiction 
• To introduce the definition of virtual presence in case of no permanent establishment 
• Proposes new nexus allocating taxing rights over the additional income
• Nexus implies that a company has a sufficient economic relationship with a certain jurisdiction