The tax issue of making the tech giants pay
Information technology has lowered barriers to trade without a physical presence in a region. Historically, countries have sought to tax companies operating in their territory. This has been turned upside down by the frenetic pace of the Internet.
Global e-commerce retail sales grew 265% between 2014 ($ 1.3 trillion) and 2021 ($ 4.9 trillion). Countries with large markets felt the need to recognize and address the fiscal imbalance (which the pandemic has exacerbated).
Because, after all, it is their people who contribute to the funds of technology companies, most of which are located in developed countries, where they pay their taxes.
“The challenges of digital taxation”
The concerted efforts of the Organization for Economic Co-operation and Development (OECD) gave birth to BEPS Action-1 in 2015, addressing the ‘tax challenges arising from digitization’, suggesting the taxation of cross-border digital transactions from three points : Economic presence (‘SEP’); withholding tax on digital transactions; and the equalization tax.
Initially, India opted for the equalization levy as a separate chapter of the 2016 finance law at the rate of 6% of the gross consideration on services which largely covered the digital advertising space.
As of April 1, 2020, e-commerce businesses have come under the equalization tax with a flat-rate charge of 2% on the gross revenues (goods and services) of non-resident e-commerce operators (including suppliers e-commerce platforms, advertisements targeting Indian customers and processing data of Indian origin).
Significant economic presence
In May 2021 (effective April 1, 2021), India operationalized SEP for non-resident e-commerce businesses by including ‘downloading data or software’ worth more than 2 crore from Indians or a threshold of 3 lakh of Indian users these companies “solicit systematic and continuous business activities or engage in interactions”.
Until recently, Indian tax courts almost systematically considered payments to non-resident companies for online advertising campaigns (Income Tax Appellate Tribunal, Kolkata in the Right Florists case) or banner advertising on portals (Mumbai Tribunal in Pinstorm Technologies) to expand business prospects were not subject to tax in India, especially in the absence of a permanent Indian establishment, effectively leaving them outside the scope of Indian tax.
The question of the violation of tax treaties in the event of an equalization levy cannot arise since it was introduced by the 2016 finance law and not by the amendment of the 1961 income tax law (the ” law “).
Although the introduction of the SEP was made by amending the law, the definition of “permanent establishment” used in tax treaties has not yet been changed and, therefore, until this is done. , the Indian tax authorities cannot yet tax these global tech giants. SEP terms such as “systematic and continuous solicitation of business” or “engage in interactions” have not been defined, which is a sure-fire invitation to increased litigation.
We also need to consider how the tax authorities will collect the data necessary to implement the SEP, let alone their verification. Like other countries, India is trying to get a fair share of the tax pie from the profits made by tech giants like Google, Facebook, Amazon and Microsoft.
However, the fear is retaliation, punitive tariffs, as happened in France. In the absence of a multilateral tax body transcending national interests, global digital and e-commerce companies are poised to face turbulent headwinds.
(The author is a partner, Bhuta Shah Co. LLP)