The equalisation levy India imposed on the advertisements that global firms like Google and Facebook generate from India may have crossed `1,000 crore, but this was never a tax on the incomes they earned out of the country; indeed, as the name makes clear, this was merely a way to ensure advertisements on Google/Facebook paid the same level of GST as was paid when an advertisement was put in an Indian newspaper/ online venture. The 2018 budget sought to tax their profits by extending the concept of Significant Economic Presence to firms that had no permanent establishment in the country, but this was never really exercised, probably because the government wanted to see how the global consensus on taxing global mainly the US, actually tech firms evolves.
Though it will take another 14-16 months for a final consensus on how the taxing is to be done, since digital firms don’t need to have a physical presence (permanent establishment, in tax jargon), OECD’s draft framework is a good start. It builds on the global consensus on Base Erosion and Profit Shifting (BEPS), or the need to prevent firms from shifting their base of operations to tax havens and thereby eroding the tax base of countries. Unlike India’s equalisation levy or even the Significant Economic Presence clause that was a unilateral move by India, the OECD concept paper is the result of a global consensus since even countries like the US found large US corporates had structured their operations in such a way that the US didn’t get all the taxes it should have. The exact details of the tax proposal need to be hammered out, and that could be a contentious exercise.
Under the plan, a certain share of the firm’s profits will accrue to the country where it is based or where it has a Significant Economic Presence; assuming India operationalises its rules for MNCs like Google. Another part of the profit, to be called the ‘non-routine profit’ there is no clarity on how much will be divided up between countries based on where the firm’s sales take place. This is likely to be an issue where there will be considerable discussion since, for instance, the US would like to tax most of Google’s profits while other countries will argue the profits accrue from their jurisdictions. Taxing a firm like Google also throws up unique challenges.
It will have a large number of customers in countries like India while the share of advertisement revenue it earns from here may be much lower; but surely, the Indian taxman will argue, the data obtained from Indian customers on Gmail or Google Maps will be contributing to Google’s ability to generate more ad revenues from even customers in the US? There will be several other such challenges that will come up and keep local taxmen busy for a long time, but the important point is that, as in the case of the WTO and trade, there is a global consensus on the need to tackle BEPS-type issues together. This has worked quite well in the case of tax havens already, and the effect of this cooperation can also be seen in the letter that officials of the US, the UK, and Australia recently wrote to Facebook on the need to ensure traceability of information for law enforcement agencies.