Digital Service Tax might supply an interim resolution

The taxation of digital companies was a key concern for the G20 countries. The agenda to reform international tax law so that digital businesses are taxed where economic activities are conducted was formally set in the OECD’s Erosion and Profit Shifting Program. Seven years after its inception, it’s still a work in progress. Many countries are concerned that they may cede their right to tax revenue and have proposed or introduced a tax on digital services. India is among the first countries to introduce a countervailing charge in 2016 to tax payments made by residents for online advertising services to a non-resident business. In March 2020, the scope of the existing countervailing charge was expanded to include a range of digital services, including e-commerce platforms. A fee of 2 per ceSuranjali Tandon nt is now applied to any payment made by non-residents in connection with an Indian user. Such an approach is often viewed as a violation of the ethos of international agreements. However, the spread of digital service taxes is a symptom of the changing international economic order. Countries like India, which provide large markets for digital companies, are striving for greater rights to tax revenue.

Fearing that daylight savings time could become the norm, in June 2020 the US opened USTR investigations under Section 301 of the 1974 Trade Act against 10 jurisdictions, including India. The aim of this investigation is to find out whether summer time discriminates against US companies. The report, released in January 2021, confirmed that the Indian countervailing levy is unreasonable and discriminatory for its sudden implementation and retrospective application, given that 72 percent of the 119 companies to which it is likely to apply are US based. It cannot be denied that the tax could result in over-taxation as the company cannot claim credit for taxes on Indian sales. Furthermore, the clarifications were not made available. However, it applies primarily to US companies as the digital services market is dominated by US-based companies. The law itself does not discriminate in any way based on size of operations or nationality and has no retroactive element.

Any company with permanent residence in India is excluded as it is already taxable in India. For example, if Company A has a local subsidiary or is a registered company, no levy is payable. If Company B operates services in India but its billing address is registered in Ireland, the tax will be applied to payments from India to that company. Experts suggest that such taxes can be passed on to consumers. While the Indian customer may not pay this as a tax, it could mean higher prices, contrary to claims that it will tax the company. The USTR investigation carries the risk of retaliation. In a similar investigation for French summer time, the US responded by threatening to impose tariffs on selected French exports, which were carried out in January 2021. However, these have been suspended amid other ongoing investigations. It seems that trade is a new form of security for tax negotiations.

The core problem to be addressed with the international tax reform is that digital companies, unlike their stationary colleagues, can operate in a market without a physical presence. The current basis for taxation in a given jurisdiction is the notion of permanent establishment. To address this challenge, countries suggested that a new tax base, such as the number of users in a country, could address the challenge to some extent. The EU and India were among those in favor of this approach. In 2018 India introduced the test for significant economic presence in the Income Tax Act. However, the proposal for a revised context was not generally supported. In addition, the implementation of a new context would require bilateral renegotiation of tax treaties that replace domestic tax laws.

In the meantime, the OECD continued to work to find common ground between a number of solutions. In October 2020, it published a draft of the solution, which should be completed by June 2021. However, stakeholder consultations this month do not create confidence. As it stands, the solution is too complex to manage and suggests allocating the remaining profit – a term that has no economic definition – which puts profits in question. It would also require political consensus on several issues, including sensitive issues such as establishing an alternative dispute settlement mechanism comparable to arbitration. This can increase the compliance burden. The US has expressed its preference to apply this measure on a safe harbor basis, which may limit the companies to which it may apply.

As countries calibrate their response to competing claims for tax sovereignty, daylight saving time is a temporary alternative outside of tax treaties. It has the advantage of taxing income that is currently in tax avoidance, and it creates space to negotiate a final, overarching solution to this puzzle.

This article first appeared in the print edition on January 21, 2021 under the title “The Cyber ​​Tax Conundrum”. The author is an assistant professor at NIPFP