India to make G20 pitch for taxing digital giants like Google, Facebook

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India has pitched for a ‘fractional apportionment’ method for profit allocation
Finance Minister Nirmala Sitharaman will push India’s proposal for taxing digital enterprises such as Google, Facebook, and Netflix in her first international engagement at the Group of Twenty (G20) ministerial on June 8-9 in Japan.India will aim to garner support for its proposal, officials said. The proposal is based on a proportional assignment of global profits of internet giants among jurisdictions where users are located. 

Base erosion and profit shifting (BEPS) refers to exploiting gaps and mismatches in tax rules to shift profits by multinational firms to low-tax regimes. 

Internet companies operate out of low-tax jurisdictions, but do business in several others without having a physical presence and end up avoiding taxes.

Meanwhile, the US is expected to pitch for its proposal for allocating only non-routine profits of companies to different jurisdictions, something seen as too complicated to be of use for developing economies.

“India’s approach is simple compared to that of the US. A lot of countries would want to adopt that. Hopefully a consensus will arrive soon,” said a government official.

The G20 ministerial will be a step towards building a political consensus to finalise a solution to tax digital economies by 2020 under the Organisation for Economic Co-operation and Development’s (OECD’s) BEPS framework.

The two-day ministerial will endorse the ‘programme of work’ report approved by the Inclusive Framework of 129 countries in the OECD to derive a globally accepted approach on taxing digital companies.

The Inclusive Framework meeting in Paris last week could not arrive at an agreement on ways to tax digital firms. As such, the report included the proposals of India and the US, besides one more approach. “India’s proposal has been included in the report, which was backed by most developing countries,” said an official who represented India in Paris.

Also, working groups under the OECD have been asked to do technical work on a range of options. The report will be taken up by the G20 Summit on June 28 in Osaka, Japan, to be attended by Prime Minister Narendra Modi, alongside US President Donald Trump and Chinese President Xi Jinping.

After that, India will begin bilateral talks with countries including the US, the UK, South Africa, Germany, and France to push its approach on widening the scope for profit attribution and nexus rules under BEPS.

“We will work towards buil-ding a consensus around that. We will start holding bilateral talks soon,” said the official.

India has pitched for a ‘fractional apportionment’ method for profit allocation, by which the profit of the group will be apportioned among countries in which the group operates through a formula, taking into account factors such employees, assets, sales, and users.

Meanwhile, the US’ ‘modified residual profit split approach’ calculates a business’s non-routine profits and allocates some or all of those profits to different jurisdictions by either using modified transfer-pricing rules or a formula method. The third proposal — “distribution-based approach” — talks about using a formula to specify a baseline profit in a market jurisdiction for marketing, distribution and user-related activities to move more taxable profits towards market jurisdictions.

With lack of a consensus, the Inclusive Framework participants were of the view that the OECD would need an early political steer to narrow down options being considered, which may come from the G20.

The report pointed out that if the Inclusive Framework did not deliver a comprehensive consensus-based solution within the agreed G20 time frame, there was a risk that more jurisdictions would adopt uncoordinated unilateral tax measures. India had imposed a 6 per cent equalisation levy in June 2016 on non-resident digital firms on advertisement revenue generated in the country. The government mopped up more than Rs 1,000 crore from the levy in 2018-19. Similarly, Italy has a web tax of 3 per cent on digital services. France has also proposed a 3 per cent tax on the advertisement revenue of digital companies.

At a BEPS meeting, New Delhi had said there was a need to rework the international tax framework regarding nexus and profit allocation rules. These should take into account the value created within the supply chain, representing the contribution of the supply side, along with the contribution of demand-side factors for determining corporate profits attributable in a tax jurisdiction.

India had argued the permanent establishment, a criterion for taxing foreign companies, should not only require a fixed place of business. It also said the definition of nexus needed to be changed to give more taxing rights to market-driven economies, or developing countries. 

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