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Worried that the proposed global digital tax deal covering only top 100 companies may not lead to sufficient revenue for developing countries, India, along with other Group of 24 (G24) member nations, has objected to the withdrawal of unilateral measures like the equalisation levy (EL) in one go.
The stand by the emerging markets grouping could potentially derail the finalisation of the global multilateral solution to tax large digital companies such as Google, Facebook, and Netflix in October. The October meeting of the Organisation for Economic Cooperation and Development (OECD) on global digital tax is being finalised on the broad understanding that unilateral measures, such as EL, would be withdrawn when the worldwide tax system comes into effect.
The global solution is aimed to ensure multinational entities pay more taxes in countries where they have customers or users than from where they operate.
In a comment to the OECD Inclusive Framework Secretariat on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, the developing countries grouping also recommended that no less than 30 per cent of tax on non-routine profits of these companies should be allocated to market jurisdictions where they have sales.
The Pillar 1 proposal talks about taxing companies with 20-billion-euro revenues and a profit margin above 10 per cent, which will be reviewed after seven years to cut the threshold to 10 billion euros. This is much higher than the 1-billion euro revenue threshold pressed by developing countries to cover 5,000 global companies.
The G24 now pressed for a gradual removal of unilateral measures, simultaneous to revenue gains from the implementation of Pillar 1.
“The G24 is of the view that the proposed appropriate coordination between the application of the new international tax rules and the removal of digital services tax and other relevant similar measures on all companies should not be at once; rather removal or standstill of such unilateral measures should be gradual and progressively alongside the implementation….on such companies,” said the G24 in the comment.
Further, if developing countries are expected to withdraw unilateral measures due to agreement on Pillars 1 and 2, there should be sufficient revenue under Pillar 1, it added.
India has been fighting for taxing rights for source countries where the markets are on the basis of sales in their territories, despite no physical presence. However, the outline of the proposal only talks about top 100 companies. For these companies, a portion of their profits would be taxed in jurisdictions where they have sales. Between 20 and 30 per cent of non-routine profits above a 10-per cent margin may be taxed. The G24 in its comment sought reallocation of profit of no less than 30 per cent on their non-routine profits.
“Given the present position, G24 strongly suggests that the reallocation percentage should not be less than 30 per cent of multinationals’ non-routine profits. With a limited number of companies and the nature of the business in scope, any share of less than 30 per cent will not ensure any meaningful revenue for developing countries - particularly small and emerging economies,” the grouping said.
The G24 comment seems to suggest that the unilateral measures like the EL should be withdrawn only for those companies that will get covered under the Pillar 1 proposal now and pay tax to the market jurisdictions, said Akhilesh Ranjan, former member, Central Board of Direct Taxes.
“They want these unilateral measures to progressively get withdrawn as more get covered under the multilateral tax measure. It does not make sense to withdraw EL for all entities with a significantly lower threshold of Rs 2 crore. As Pillar 1 talks about revisiting the threshold after seven years, the unilateral measures may be withdrawn for more entities that time. This will be a tricky issue to address,” added Ranjan, who is currently an advisor at PwC India.
The inclusive framework on base erosion and profit shifting (BEPS) brings together nearly 139 countries and jurisdictions around the globe to collaborate on the implementation of the OECD BEPS package.
BEPS refers to exploiting gaps and mismatches in tax rules to shift profits by multinational companies to low-tax regimes. Internet companies operate out of low-tax jurisdictions, but do business in several others, without having a physical presence and end up avoiding taxes.
The proposed multilateral solution consists of two components. The first pillar is about reallocation of additional share of profit to market jurisdictions. The second pillar relates to minimum tax and is subject to global tax at 15 per cent. Estimates suggest that $150 billion of additional tax revenues should be mobilised under the second pillar.
However, not much may go to the developing countries. For instance, the International Monetary Fund, in a report titled Digitalisation and Taxation in Asia, estimated the emerging markets, including India, would lose revenue or have a modest revenue gain under the deal being negotiated. The report pointed out that with a 10 per cent profitability threshold and with 20 per cent of non-routine profits reallocated, India, Indonesia, and Malaysia could lose about 0.01 per cent of gross domestic product in revenue or have a modest revenue gain.
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.
