The Organisation of Economic Co-operation and Development (OECD) has proposed an overhaul in the taxation system for multinational companies. This move could force entities, including digital giants Google, Netflix, Facebook, and Amazon, to shell out taxes in countries where they do not have physical presence.
The consultation paper floated by the 36-member bloc will also affect India’s right to tax these companies. While the Central Board of Direct Taxes has lauded the general intent, it has also expressed reservations over certain provisions. The final agreement is expected by 2020.
The 21-page proposal was put out on Wednesday, aiming at fair taxation of digital firms — whether digital or own profitable brands — from apparels to cars.
If a consensus is arrived at, it will provide taxing rights to countries and jurisdictions where these MNCs have their markets.
“In a digital age, allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence. The current rules, dating back to the 1920s, are no longer sufficient to ensure fair allocation of taxing rights in an increasingly globalised world,” OECD said in the paper.
OECD made a unified approach and suggested the creation of a new nexus rule (largely dependent on sales) that would not depend on physical presence in the user/market jurisdiction.
Further, the new system has gone beyond the arm’s length principle for allocation of profits, by using formulae-based apportionment.
The unified approach seeks to deliver greater tax certainty for both taxpayers and administrators, by suggesting a three-tier profit allocation mechanism.
A CBDT official said that India supports the global bloc’s plan but differs from the unified approach to allocating profits. India, which is party to the discussion, will raise its reservations in the next meeting, scheduled for December.
“Though this is only a consultation document by the secretariat and does not give out recommendations, it gives some direction as to where this complex issue is headed. OECD needs to quickly form a consensus, as countries are increasingly adopting unilateral measures that are typically on gross sales. India’s draft report on profit attribution gives weight to sales, and users as a factor for profit attribution,” said Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP. OECD’s consultation paper Unified Approach under Pillar 1 says it advances international negotiations for fair taxation of digital companies. It lays emphasis on re-allocation of profits and corresponding taxing rights to countries and jurisdictions where MNCs have their markets.
Pillar 1 comprises the “user participation”, “marketing intangibles”, and “significant economic presence” proposals. The policy note stated that these proposals would entail solutions beyond the arm’s length principle. Pillar Two pertains to the remaining ‘base erosion and profit shifting’ issues.
An OECD release says the document brings together the common elements of “competing proposals”.
It adds that it will ensure that MNCs conducting significant business in places where they do not have a physical presence, be taxed in such jurisdictions.
The proposals need to be agreed upon by January. Stakeholders have been asked to furnish comments by November 12.