Experts seek clarity from OECD in plan to tax multinational digital giants

Largely welcoming the Organisation of Economic Co-operation and Development's (OECD’s) proposal to tax multinational digital companies, experts said there is a need to define certain terms before participant countries agree on a common ground. 

The OECD on Wednesday had proposed an overhaul in the taxation system in a paper titled Secretariat Proposal for a “Unified Approach” under Pillar One which could force entities, including digital giants Google, Netflix, Facebook, and Amazon, to pay tax in a country, even if they don’t have a physical presence there, but earns income from it.

“Some questions that require clarity in the proposal are — what is meant by digital business; what is the threshold for taxation in a given country; how much should a company be taxed (percentage-wise); and how will this be administered globally, given that different countries have non-uniform taxation standards,” said Frank D'Souza, partner and leader, Corporate & International Tax, PwC. 

The proposal covers “highly digital business models”, as well as “consumer-facing businesses”, but does not explicitly define them. 

E-commerce giant Amazon welcomed the proposal from the OECD. “We continue to actively support and contribute to the OECD's work to achieve a consensus-based solution with respect to taxation of the evolving international economy. Reaching broad international agreement on changes to fundamental international tax principles is critical to limit the risk of double taxation and distortive unilateral measures, and to provide an environment that fosters growth in global trade, which is vital for the millions of customers and sellers that Amazon supports around the globe," an Amazon spokesperson said. 

SR Patnaik, partner & head, Taxation, Cyril Amarchand Mangaldas, said: "The implementation of Unified Approach would have a significant positive impact on consumer-heavy tax jurisdictions like India." 

On the issue of a threshold for taxation, the OECD proposal mentioned "thresholds, including country-specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit". 

The concept or requirement of having a "permanent establishment" or a physical presence has been contentious for taxation of digital firms, which have often faced flak for not paying taxes in different jurisdictions. 

Different countries have tried different ways to tax digital firms.

For instance, in 2017, India introduced an "equalisation levy" on certain kinds of online and digital businesses. It was 6-8 per cent of gross payment if the provider of the service is a foreign entity without a "permanent establishment" in India. 

 Among other countries, France recently introduced a 3 per cent digital services tax on sales generated there by multinational firms like Google and Facebook. 

 "The OECD proposal is something India would find agreeable. The good thing is that there will not be any unilateralism. It is interesting that the OECD proposal talks about special factors and countries can ask for additional taxation based on them," said Shefali Goradia, partner, Deloitte India. 

The proposals need to be agreed upon by January. Stakeholders have been asked to furnish comments by November 12. 

About the proposal 

• Seeks to tax the profit from sales made by digital multinationals in countries without having a commensurate presence there Aims at solving tax challenges for countries where users of highly digitalised business models are located
• Proposes further discussion to define digitalised business and consumer-facing business
• Moves away from the concept of the permanent establishment of MNC in a foreign jurisdiction