india

Updated: Oct 11, 2019 01:13 IST

The Union government has signalled its support for a plan by OECD nations to make big digital companies such as Facebook and Google pay taxes in countries where they have a significant number of users, a proposal that could lead to a revenue windfall for a country like India that has an online population of millions.

OECD, or the Organisation for Economic Co-operation and Development (OECD), includes some of the most prominent economies among its members and the proposal, experts said, would alter fundamental international tax principles but could face opposition from the firms that are mostly based in the United States of America.

According to two government officials who asked not to be named, India has given an “in-principle” approval to the proposal. “The government has two basic concerns with regard to global online giants and e-commerce companies such as Amazon, Flipkart, Google, Twitter and Facebook – the loss on account of tax revenue and the loss due to unregulated information. The OECD proposal is a step in the right direction, but it will address only one issue. The second issue relates to such companies storing data in countries were they operate is also important,” one of the officials, who has direct knowledge of the matter, said.

The second official, working for one of the ministries overseeing economic matters, said the OECD’s proposal would reinforce India’s demand of having an “equitable” share in taxes on revenues earned. The proposal will immensely boost revenues of countries like India, which is a prime market for multinational online giants, this person added.

The OECD secretariat on Wednesday published the proposal to advance international negotiations to ensure large and highly profitable multinational enterprises, including digital companies, pay tax wherever they have significant consumer-facing activities and generate their profits. The discussions are likely to go on till next year.

The lobby of mostly rich countries will present a report after incorporating inputs from stakeholders during the next meeting of G20 finance ministers and central bank governors in Washington DC on October 17-18. India will also be represented at the meeting.

“The Inclusive Framework’s tax work on the digitalisation of the economy is part of wider efforts to restore stability and certainty in the international tax system, address possible overlaps with existing rules and mitigate the risks of double taxation,” the OECD said in a statement on Wednesday.

At present, digital companies are able to pay little or no corporate tax on revenues they generate from activities such as ad sales in countries where they do not have a large physical presence. They declare most of their profits where they are headquartered.

A similar move by France in July triggered a spat with the United States, which opened an investigation and its president Donald Trump signalled retaliatory tariffs on items such as French wine. During an engagement between the two countries’ leaders in August, France said it will withdraw the tax, set at 3% for companies that earned more than $27.86 million in French revenue, once OECD comes to an agreement on how such issues will be resolved.

An Amazon India spokesperson said the OECD proposal is an important step. “We continue to actively support and contribute to OECD’s work to achieve a consensus-based solution with respect to taxation of the evolving international economy. Reaching broad international agreement on changes to fundamental international tax principles is critical to limit the risk of double taxation and distortive unilateral measures and to provide an environment that fosters growth in global trade, which is vital for the millions of customers and sellers that Amazon supports around the globe.”

A Twitter India spokesperson offered no comment and spokespersons of Google, Flipkart and Facebook did not respond to queries.

According to experts, the changes will have a sweeping impact.

“The OECD’s ‘unified approach’ looks set to be a major overhaul of the international tax system. It will have far reaching impact on multinational enterprises, whether or not they are heavily involved in digital business and may have impact or consequences for traditional models as well,” said Rajendra Nayak, partner, International Tax & Transaction Services, EY India.

Ajay Rotti, partner, Dhruva Advisors, said: “While India has also been actively involved in taking measures to tackle this issue, it seems that the formulary approach based on apportionment of weights to market jurisdiction could be the unified approach. One would have to wait and see if and when the proposals are implemented by the Indian government.”

A third analyst said most market jurisdictions would be supportive of the proposal but the mechanism will likely involve several factors. “The ideal formula will need to take into account many factors such as weightage of market factors, contribution of intangibles, life cycle of digital product or service, mobility of different production factors etc. OECD will be doing further work on this,” said Shefali Goradia, partner, Deloitte India.

“While the specific methods of calculations suggested in the Unified Approach [by OECD] is a welcome move, identifying an ideal formula would require the test of time,” added SR Patnaik, partner and head, Taxation, Cyril Amarchand Mangaldas. “However, for starters, it may be a good idea to come up with a formula linked to the revenue of the concerned MNC wherein the concerned countries are entitled a proportion of profits, so long as the allocation does not result in any double taxation,” he said.