Digital tax or equalisation levy is a reactionary measure either proposed to be adopted or already implemented in multiple countries to ward off an onslaught by e-commerce groups monopolised by the United States. An unprecedented situation has come into play as it polarises the world into two groups — the US and the rest of the world. The COVID-19 pandemic has compromised the economic potential of many developing and developed countries, leaving them with the only option to resort to more taxes or levies. The digital economy is one of the unexplored areas to fill the void, attracting thereby a digital tax on the services and goods provided by e-commerce/aggregators giants. This has irked the US because of its obvious dominance in the sector.
Digital economies are reaping benefits in other jurisdictions even without a physical presence there, hence punching a hole in the tax laws of the respective regions. This causes a loss of revenue to countries that have a considerable consumer base for these e-commerce/aggregators behemoths. Countries are being subjected to tax base erosion due to a paradigm shift in the tax domain given the advent of the digital economy. Hence, they have come up with the solution of digital tax or levy.
A Level Playing Field
India also introduced a comprehensive equalisation levy of 2% digital tax on the foreign e-commerce industry from April 2020. Nirmala Sitharaman, the Finance Minister of India, while explaining the logic behind the introduction of the equalisation levy, stated, “Equalization levy was imposed to give level playing field to Indian businesses who pay tax in India and foreign e-commerce companies who do business in India but do not pay any income tax here.” Similar measures have been adopted by other countries, too. France, for example, imposes a 3% digital services tax on revenues generated in the country by digital companies, wherever they are established, if they make annual supplies of taxable services of more than €25 million (approximately $29.54 million) in France and €750 million (approximately $886.33 million) worldwide. The digital service tax has been introduced by Singapore, Indonesia and Malaysia in their respective domains.
Why is digital taxation becoming a norm rather than an exception? It is because of the uneven distribution of revenue among different jurisdictions and equitable revenue distribution that a basic canon of international taxation has been debased.
The US is probably the only country that is swallowing an inequitable share for itself at the expense of the revenues of other countries.
The United Nations Conference on Trade and Development (UNCTAD) in its 2019 digital economy report estimates that “as for profits, United States global platform companies earned the largest amounts”. It said, “They accounted for 80 per cent of the profits of the world’s 50 largest digital platforms, in 2015, compared with only 5 per cent earned by European ones.” The corollary of this dominance is that digital taxes by other nations would affect the revenue cornered by the US, as it has entered into a double taxation avoidance treaty with several countries.
The OECD's Inherent Bias
Due to a potential revenue loss, the US adopted retaliatory measures against countries that had implemented digital taxation. India was also one of those countries. But the resistance by the US did not last long and it rolled back punitive tariffs shortly after. The tussle between the US and other countries is still simmering, and to defuse tensions, the Organization for Economic Cooperation and Development (OECD) has come up with a solution for the deadlock on digital taxation in the name of ‘OECD Secretary-General Tax report’.
It has proposed a two-pillar solution in the stated report, which would strike an equilibrium in the distribution of digital tax revenue among service providers and the countries where the consumers avail the services. But the question is, does the proposal adequately take into consideration the concerns of developing countries?
A reason for this perplexity is the OECD itself. It is admitted by the OECD that its work on trade policies boost American export to the tune of $1 billion per year. Also, US taxpayers save $800 million through an OECD export credit agreement. Further, the OECD is pushing for policies that level the field for American companies, make globalisation work more fairly for American workers and families. That this niche is carved out for a specific country by a powerful group stokes legitimate concern about its impartiality.
The OECD proposal consists of some conflicting provisions to the Indian equalisation levy. For example, the revenue sourcing clause of the report postulates that the revenue will be sourced to end-market jurisdiction, where goods and services are used or consumed. Though this seems accommodative, it fails to answer who would enjoy the tax revenue if residents, particularly in the Indian case, purchase goods and services in some foreign country, let’ say the US, for their consumption? Would the US allow letting the revenue go to the coffers of India? On the same lines, if a US citizen or resident purchases goods and services to be delivered in the US from a non-resident e-commerce operator by using an Indian Protocol (IP) address during his short visit to India, would the US allow India to tax him as per Indian laws? These are some hard-hitting questions left unanswered by the OECD for debate and discussion between the negotiating countries, thus showing the hollow nature of the solution provided by it.
A Lacklustre Solution
Another issue concerning the US is that the so-called equalisation levy is not covered under the definition of income tax. Hence, the double taxation avoidance agreement between the two countries is of no avail. The OECD does not have a concrete solution for such technical problems, and hence, the mess is left to the negotiating countries to solve.
The only way an alternative framework could succeed is if every country agrees to exactly the same allocation rules and applies them in the same way, so that income is taxed only once.Barbara Angus, Global Tax Policy Leader, Ernst & Young
According to the OECD proposal, only those countries are empowered to tax MNCs from where the group receives more than €1 million annually. In current prices, it roughly comes to the tune of ₹8.65 crore. Hence, taking into consideration all accounting sophistries and the threshold of current exemption from equalisation levy in India for foreign e-commerce operators having sale, revenue or a gross turnover of less than ₹2 crore, during the previous year, a huge loss of revenue is on the cards.
The OECD report on digital taxation is a lacklustre solution to thorny issues. The adherence to Base Erosion and Profit Shifting (BEPS) principle has seemingly been thrown out the window.
The OECD should not act as a vassal of the US. The market size of developing nations is vast and vibrant, and hence, their interests should be taken into consideration.
The US shall have to cede its adamancy to garner massive revenues from the digital economy by depriving other countries. Indian authorities have to negotiate carefully with OECD countries. Given a stressed economy, the government should throw open a forum for receiving suggestions from all quarters, and only after arriving at a broad consensus, it should adopt a further course on the OECD proposal.
(The author is an advocate based in Maharashtra. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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