Global Economy

US hurdle in unified plan to tax digital cos


In a sudden development, the US government has raised concerns over the proposed rules for taxing highly digitalised global companies such as Amazon, Google and Facebook. The broad framework of the proposed rules granted additional taxing rights to a country where customers of such multinational enterprises (MNEs) resided.

Highly digitalised companies have substantial customers in several countries from which the revenue is derived. However, as they do not have a physical presence (referred to as a permanent establishment) in these countries, current international tax norms do not enable the source countries (where customers are located) to levy tax.

The letter raising concerns, sent by US Treasury Secretary Steven T Mnuchin, to the Organisation for Economic Co-operation and Development (OECD), which is facilitating the introduction of a new set of globally accepted international taxation rules, has come as a rude shock. A total of 135 countries, including India, (jointly known as the Inclusive Framework) are currently working towards a unified approach to tax the digital economy and a global consensus was expected by the end of 2020. Until the release of this letter, the US had seemingly supported the new nexus norms.

TOI in its October 10 edition had reported on the draft secretariat proposal (titled The Unified Approach under Pillar 1), released by OECD. Under it, residual profits and corresponding taxing rights would be reallocated to countries, where the consumers are based.

The proposed rules were to determine where the taxes should be paid (nexus rules) and on what portion of profits they should be taxed (profit allocation rules). It was a co-ordinated effort to update the international tax norms and transfer pricing rules to factor in new digital business models, where a physical presence in another country was not required.

India was an active participant in the deliberations, as highly digitalised global companies have a huge consumer base here and stakes are high. To illustrate, there are over 270 million Facebook users in India, making it one of the leading countries in terms of user size.

India was appreciative of the proposal to define an alternate nexus (which was not tied with having a physical presence), but it was expected that it would negotiate harder to define a profit allocation framework that would work more in its favour.

While the US, in its letter to the OECD, has expressed support for greater tax certainty, it has reservations about where taxes should be paid and on what basis. To quote the letter, “We have serious concerns regarding potential mandatory departures from arm’s length transfer pricing and taxable nexus standards —longstanding pillars of the international tax system upon which US taxpayers rely.”

Responding immediately, OECD secretary general Angel Gurria shot a letter dated December 4, stating, “It were your personal interventions at G20 meetings that moved the discussions to a broader scope, using a more formulaic approach and a new nexus concept that moved beyond the tax rules as they currently stand.”

Speaking to the TOI, Grace Perez-Navarro, deputy directory, OECD’s Centre for Tax Policy, said: “Highly digitalised activities need a new set of rules. If substantial activities are carried out, albeit remotely that country should have the right to tax. The current permanent establishment rules and transfer pricing rules were not able to capture that. In the work we are doing, we have not entirely thrown out the arms-length basis.”

“First, the new rules would apply to only very large MNEs and only those that engage in consumer facing businesses. Second, only a part of the proposal (amount A) goes beyond the arm’s length principle. The so-called “amounts B and C” of the proposal are intended to be in line with the arm’s length principle,” she added.

“Amount A” refers to the residual profits, which would be allocated to countries where the customers are, based on an agreed variable such as sales. “Amount B” is the fixed remuneration for distribution activities performed by a related party (say subsidiary) in another country and “amount C” refers to local functions that go beyond the distribution activities that are carried out.





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