International Tax Reforms – Will India Receive Fair Share Of Digital Revenue

As we are moving towards October, it will be a closely watched affair, how International Tax Reforms based on Two-Pillar Solution will addresses India’s concern’s, for receiving a fair share of revenue from the business activities of Big Tech, operating in India.

Reforms are on Fast track. Recently Secretary of the Treasury Janet L. Yellen spoke with Mr Bruno Le Maire, French Minister of Finance, Economy and Recovery, expressing her continued support for improving the global tax system.

These reforms are imperative for United States, along with the rest of the world, wishing to fix the loops of tax evasion, arising from absence of boundaries in the digital economy.  Washington is contemplating these reforms seriously as they need a bigger tax base for investment in Infrastructure and meeting the sovereign obligations.  

Existing Tax systems do not mee the challenges of tax measurement, thrown by the Digital economy and complicated tax efficient business structures operating in tax heavens and tax friendly jurisdictions. Today big tech corporations operate Globally without physical presence, have control over data and their assets are intellectual in nature.    Today Large Tech Companies generates a huge amount of revenue through various services including advertisement, without having actual physical presence. Rules are applicable not just to technology but to wider set of business except financial services and extractive industries.

Reforms will require the multinational to pay in the jurisdiction of origination of Revenue.  The proposed solution consists of two components- Pillar One deals with reallocation of profit to the market jurisdictions and its scope will cover, Multinational Enterprises (MNEs), whose Global Turnover is above € 20 bn and PBT above 10%. Certain percentage of residual profit, in excess of defined revenue threshold will be allocated to market jurisdictions, based on the rules. Agreement envisages that threshold may be reduced to €10 billion after seven years. Pillar Two consist of providing minimum tax, subject to tax rules. Deal may impose a minimum Global Corporate Tax Rate of at least 15% has been agreed to by G7 countries.

Presently various countries have their own set of Rules to Tax multinationals companies operating search engines, social media platforms and online marketplaces. E.g UK imposes digital service tax (DST) of 2% on the revenues exceeding £25m from UK users. France and Italy also levy DST. This has been a cause of concern with G7 as earlier Washington have expressed to retaliate by levying tariff at higher rates on import from these countries. 

Indian Government resorted to tax the large tech by framing provisions of equalization levy, applicable to non-resident engaged in online advertisement, online sale of goods and services through digital platform, for avoiding interim tax loss. With proposed International Taxation Reforms, India will have to withdraw equalization levy. With proposed new laws, India’s will be expecting a higher share of profits attributable to revenue generated from Indian Markets along with addressing the issues of profit shifting and treaty shopping. India’s concern on meaningful and sustainable revenue, arising from market jurisdictions are valid and in tandem with expectations of rest of the World to get a fair share of revenues arising from digital activities in their home jurisdiction.

Bureau Galactik Views

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