A key take away from the G20 Finance Ministers and Central Governor’s Meeting that was held last week is the creation of a digital tax for multinational technology companies. This simply means that digital companies such as Facebook and Google will soon have to pay taxes regardless of their physical presence or measured profits in the source countries. Though US staunchly opposes it, given that majority of these tech biggies are physically headquartered there, countries such as Japan, India , UK and France have batted for it, citing the need for both regulation and to get a “fair” share of taxes from the revenue generated by such businesses.
A world that is increasingly predominated by everything digital evokes the imperative to create a separate framework for taxing these online service providers. A pertinent example includes the increase in value of e-commerce transactions from 19.3 trillion in 2012 to $27.7 trillion in 2016, which outlines the necessity in recognizing the tradability in digital goods.
Now, the DNA of this digital economy functions way differently from the traditional brick and mortal businesses. This is because the digital economy is characterized by a unique system of value creation, resulting from a combination of factors such as sales, function, algorithms and personal information of users. Although using consumer data as a metric to drive businesses is not exclusive to the digital economy, it accumulates a large space in the revenue map of technology companies, where value created by user participation translates into revenue.
It was the European Union that initially floated the idea of a Digital Service Tax (DST). The proposal for the DST directive was intended to establish a common system for the taxation of digital services for revenues generated by the supply of these online companies. It mandated that a company established in a member state offering digital services in other member states would have to pay a 3 percent DST in each member state where revenue is generated. Despite the promise in initial intentions, the policy stifled short of achieving a unilateral consensus and is pending as of now.
On a similar angle, India too adopted some unilateral measures. A reckoning was made with the accommodation of a 6 % equalization levy (EL) within the Finance act 2016, for specified digital services (particularly advertising services) provided to residents in India. However, are cognition of the burgeoning digital economy paved way for an expansion of the business connection to “Significant Economic Presence” (SEP) that includes digital services under the Finance Act 2018.
What is interesting is, an evaluation of these companies in an SEC report lists two major components i.e. user participation and marketing tangibles under profit allocation. But, it is the issue of user participation that leaves one befuddled. Although, it is known that these tech companies often generate massive value through highly engaged user participation from source countries, but since this assessment of the value of user contribution is non-quantifiable, determination of a taxing threshold becomes difficult. So even at the behest of recognizing the virtual space as constituting a nexus for the purpose of taxation becomes novel, but it clearly lacks the metric of user threshold.
Thereby, since a company that manages to earn huge revenues from the country through remote digital participation, it is only natural that a portion of the company’s profit be allocated based on the market activity undertaken in such country. But, to do this would include deliberations by policy makers to devise a methodology to assess the user contribution objectively, which would in turn then lead to efficient taxation.
India Outbound
June 19, 2019
source https://indiaoutbound.org/digital-taxation-and-the-path-ahead/
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