A. Introduction
IT has been an age old saying that "Global Problems require Global solutions". The statement applies squarely to the present debate surrounding International Taxation concerning taxing the digital economy. The Century old International Taxation rules, though fit enough to tax the Brick and Mortar business models, do not come to aid for taxing digital business. The problem being Global, requires Global consensus for a solution. Unilateral measures would have any-day made the situation more bizarre, with the Digital businesses being the main victims.
Easier said than done, building global consensus on acceptable taxing methodologies takes its own time considering that resident countries will have to part with their existing rights in favour of consumer/user facing economies. This wait has probably been the entire reason behind Countries like India introducing unilateral measures such as the recent equalization levy introduced in March 2020. While it is expected that Global Consensus would be reached once OECD comes up with the final solution, till such time Countries are banking on such unilateral measures to collect tax.
While one is now aware about what measures India has taken, there is a rising curiosity to know what measures other countries have taken and how do they compare with India. This Article discusses the same.
B. Alternative applications of the 'Permanent Establishment' (PE) concept
Similar to the Significant Economic Presence ('SEP') concept introduced by India, countries, such as Indonesia and Israel have also introduced unilateral nexus rules to broaden the present nexus rule of PE. While India has deferred its applicability to AY 2022-23, so as to wait for the final report from OECD, these Countries have already implemented the rules in their Domestic Law. In the absence of any change in the tax-treaties, how the new nexus rule is making an impact in these countries is interesting to note and this aspect is briefly highlighted in the paragraphs below:
Indonesia - concept of "Deemed PE"
Under the Indonesian Income Tax Law, overseas e-commerce companies having significant economic presence in Indonesia are deemed to be a PE. The significant economic presence is determined based on factors, such as transaction values, volume, packages shipped, and user traffic on the business platform.
Interestingly, the Indonesian law also provides that if the above concept of 'Deemed PE' cannot be applied because of available tax treaty exemptions, an Electronic Transaction Tax (ETT) will be imposed on sales to Indonesian buyers/users. Although, there is not much guidance on the rate of ETT and whether ETT is to be considered as a tax on income and eligible to tax-treaty benefit, as a concept this is in line with India's Equalisation levy.
Digital tax policy of Israel
As a direct tax measure, Israel had introduced the concept of Significant Digital Presence (SDP) to establish taxable nexus with Israel. Being mindful of the fact that the measure would become ineffective for countries where tax-treaties exist, Israel Taxman brought this specifically for situations where no tax treaty is in place. The criteria for a foreign company to be considered as having SDP is based on factors such as significant amounts of contract for internet services with Israeli residents, web traffic by Israel users etc.
For residents of countries with which Israel had tax-treaty, the Taxman also clarified that due to distinct nature digital economy, a company that has significant digital presence in Israel and conducts activity on the ground in Israel may, under certain circumstances, be considered to have a PE even if the activity is of a preparatory or auxiliary character only.
C. Tax on Digital Transactions without establishing 'Nexus' through 'SEP'
The unilateral tax on digital transactions, without constitution of PE, has captured the headlines in the recent past. With various Countries (such as France, Italy, Austria, UK) imposing such a tax, it seems to be the best possible mechanism to tax digital businesses till a Global consensus is reached for a Unified approach.
The source of inspiration for introducing such tax lies in the BEPS Action Plan 1. The Action Plan evaluated various options to tax digital businesses, wherein one such option was imposing equalisation levy. Much to the surprise of all, in its final recommendations, apart from recommending changes to treaty definition of a PE, the Action Plan did not recommend any other discussed options. However, it left the choice open to the countries, to introduce any of the options in their domestic laws as additional safeguards against BEPS, provided they respect their existing treaty obligations.
While discussing about Equalisation Levy, Action Plan suggested to use it as a backup mechanism to enforce net-basis taxation on the basis of SEP nexus, rather than as a standalone option. However, Countries have introduced such taxes on a standalone basis as well.
An important question which arises in this respect is that, when the intent to bring equalisation levy was to collect Corporate Income Tax (CIT), how are countries taking a position that tax-treaty benefit would not be available for such tax?
The answer to the same also emanates from the Action Plan. Although, the intent of this levy is to collect tax equivalent to CIT from digital players, the Action Plan does not refer it as a tax on income. The Action Plan, however, calls it as an 'Excise Tax' or a tax on final consumption, which shares common features with Sales Tax. By giving such a meaning, the Action Plan provided a unique solution to countries to implement it as a tax on consumption (similar to GST in India), with the objective to make good the loss of CIT from digital players. The Action Plan, however, also attaches it with a caveat that countries may introduce such measures, provided they respect their existing treaty obligations.
Countries have happily taken a position that such a tax, being a consumption-based tax, does not fall within the ambit of 'taxes covered' in the tax treaty, thereby, taking a stance not to grant treaty benefits.
Those keeping track of developments in International Tax have been taken aback by this unilateral measure. This is simply because, it has tested their entire understanding of International Tax as a concept, which necessitates fulfillment of tax-treaty obligations not only in 'form' but in 'substance' as well.
D. Tax on Digital Transaction - Position of other Countries
France
France had implemented tax on Digital services from 1 st April 2019 of 3% of Gross revenue. The tax is dubbed as GAFA Tax, named after technology giants Google, Apple, Facebook and Amazon. However, recently, French Finance Minister announced that France has agreed to suspend the collection of same until December 2020. This move is in exchange of US agreeing to hold off on retaliatory tariffs on French goods.
Although, the tax introduced by France is similar to equalisation levy introduced by India, its scope and applicability is lot narrower than India's equalisation levy. The key differences in this respect are as under:
- The GAFA Tax is applicable only on certain specified services and not on direct sale of goods or services online. Equalisation levy introduced by India recently, is applicable on sale of goods also.
- The GAFA tax is applicable to taxpayers having at least global revenue of EUR 750 million and EUR 25 million revenue generated in France. This is much higher than the threshold provided under Indian Law, i.e, INR 2 Cr.
An interesting thing to be seen would be that, while USA has taken retaliatory measures against France for imposition of the GAFA tax, will USA propose similar measures against India? News reports already say USA could take such measures 1. What measures it takes and how India responds, will be crucial in determining the fate of unilateral measures taken by India.
Similar to France, countries such as Italy, UK, Austria have also introduced tax on digital services. In taxes introduced by those countries as well, the minimum turnover threshold required for applicability of such tax is much higher and also the scope of services included within it is much narrower.
E. Take-away from other Countries Approach
In the race of implementing unilateral measures, India is not the only country, there are significant number of countries who have taken similar measures. However, Indian Taxman seems to be much more aggressive than others in the race, by keeping the scope of new measures broad. Building a Global Consensus is the need of the hour, till then, unilateral measures will continue to jeopardize the digital players.
(Harshit Khurana, Senior Associate and Devashish Jain, Associate, Lakshmikumaran & Sridharan & Views expressed are strictly personal.)
1https://economictimes.indiatimes.com/tech/internet/google-tax-could-draw-reprisal-us-cautions-india/articleshow/75416016.cms |