Google Tax did not address tax challenges of digital economy

Income of a foreign entity is chargeable to tax in India
The digital economy was going untaxed, which led to decades of brainstorming at OECD (Organisation for Economic Cooperation and Development), resulting in ‘Action Plan 1-Addressing the tax challenges of Digital Economy’ under the Base Erosion Profit Shifting (BEPS) Project.

Being an observer of the BEPS project, a new terminology was toyed by the Indian tax administrator to tax ‘Googles’ and ‘Facebooks’ of the world — Google Tax. A new kind of equalisation levy at six per cent was introduced to tax digital advertisement platforms effective June 2016. 

But, Google Tax was not the answer to the tax challenges of the digital economy, since it was eventually borne by Indian users and Google remained unaffected by and large from this levy.

Recently, going against the principles laid by Indian courts in the past on taxability of advertisement revenue, the Bengaluru bench of Income Tax Appellate Tribunal (ITAT) has put Google India under the ‘tax net’ by asking it to pay the same on AdWords revenue of Rs 1,457 crore remitted by Google India to Google Ireland (GIL) over the past six years. This came as a blow to the world’s favourite search engine, which has decided to file an appeal against the ITAT order.

Why was AdWords revenue remitted to Ireland?

Ireland has especially low tax rates for multinational companies, leaving other countries short-changed. Google has been routing its AdWords revenue to its Ireland subsidiary, GIL, to achieve tax efficiencies. In this ruling, India has treated Gle more harshly than other countries that were losing on their fair share of taxes.

France’s stance

Google employed 700 people in France through its subsidiary there. But, it used a division based in Ireland (GIL) to sell French customers digital services like its well-known advertising platform AdWords. The case hinged on whether Google owed various taxes in France, even though it sold services from Ireland. The Paris Administrative Court has recently (July 2017) ruled that GIL was not liable for French corporate income tax, value added tax and local business tax.

Australia’s struggle

Google had an Australian firm for local operations. Advertising revenues generated in Australia were not paid to this company. Rather, they were paid to an overseas firm in Singapore. Addressing this issue and ensuring their fair share of taxes, Australia levied GST on Google AdWords revenue last year (November 2016). GST in Australia cannot be levied on an overseas company, owing to which Google Singapore assigned its service agreements to Google Australia.

India’s case

Income of a foreign entity is chargeable to tax in India if the same falls under the category of business income where the foreign entity has a permanent establishment in India or the income qualifies as royalty of fees for technical services.

In the present case, Indian tax authorities have dived deeper beyond the form of the arrangement in place to understand the real conduct of Google while providing the AdWords Space to advertisers. AdWords is not like buying ad space in a newspaper or a magazine. Rather, it is a focused targeted marketing for the product/services of the advertiser by the assessee/Google with the help of technology for reaching the targeted persons based on the various parameters of information. ITAT has distinguished the earlier ruling on advertisement revenue, where it was a mere display of an advertisement by the advertiser on the website, and held that in the present case, and since it uses patented technology, secret process and use of trademark, it qualifies as a royalty.

Impact on other multinationals

This is a significant ruling for other multinationals operating out of Ireland and other tax havens, merely to avoid taxes in India. They may have to relook at their arrangements that generate revenue from India since Indian courts are clearly keeping pace with the ever-evolving business models. Reading between the lines of various clauses of the arrangement in place that have their source of income in India, Indian courts won’t let go of its fair share of taxes. With the general anti-avoidance rule in its toolkit, the tax planning done with the principal purpose of tax benefit won’t go unnoticed and untaxed by Indian authorities.

(Rakesh Nangia is managing partner, Nangia & Co, while Neha Malhotra is executive director in the firm)

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