India may use BEPS route to tax digital entities like Google, Facebook

In the 2018-19 Budget, India has taken a global lead to tax digital entities with large user base or business in a country by proposing to suitably amend the Income Tax Act

Sensing that the Union Budget’s intention to tax Facebook, Netflix, or Google may take years to materialise, India may propose it strongly under the international tax framework of the Organisation for Economic Co-operation and Development.

The framework, technically called the multilateral instrument (MLI) to implement tax-related measures to prevent base erosion and profit shifting (BEPS), will avoid the need to amend individual bilateral treaties.

In the 2018-19 Budget, India has taken the lead to tax digital entities with a large user base or business in the  country by proposing to suitably amend the Income Tax (I-T) Act. However, the existing double taxation avoidance agreements (DTAAs) will not be covered by the proposed change, implying that in order to tax Facebook, Google and the like, India will require to renegotiate tax treaties. 

Renegotiating the treaty with the US is a tedious task, according to officials. Negotiations stretching over 20 years had led to the signing of the agreement in 1989.

“Amending the treaty with the US is difficult, unless it also wants to introduce the provision. 

We would be lucky if we are able to amend the India-US treaty in even five years. The fact that the provision will not apply to existing treaties is a challenge for the time being,” said a senior government official.

The digital companies will fall in India’s tax net only when the existing treaties are reviewed or when new ones are signed.

However, the MLI will automatically amend the bilateral tax treaties to include the taxation provision for digital businesses, avoiding the pain of separately negotiating existing treaties. India has DTAAs with 82 nations, including all popular tax haven countries.

“We will insist that there is an MLI on digital taxation. We have taken the lead and laid the ground for negotiation. Many countries may come together to sign the MLI and the treaties will be automatically amended,” said the official. But, even that may take three years. Also, countries may express reservations on particular provisions of the MLI. Taxing the digital economy is also being discussed in the BEPS framework, which aims to check cross-border tax evasion by global companies exploiting gaps in tax treaties and tax-planning strategies.  

The government is hoping that other countries also push for it in the BEPS framework. Introducing the provision in domestic law is key to taxing digital companies with a presence in India.

According to the amendment proposed in the Budget, the I-T Act will provide that significant economic presence in India will also constitute business connection. Significant economic presence could include download of data or software in India or engaging interaction with a prescribed number of users in India through digital means.  

“We will hold stakeholder consultations for the guidelines,” said the official.

In 2015-16, Finance Minister Arun Jaitley had introduced 6 per cent equalisation levy for online advertisements, but constitute only a small portion of the operation of these companies.

“Equalisation levy is the second filter. The first filter will be through widening the definition of business connections,” said the official.

India recently revised its tax treaties with low or zero-tax jurisdictions such as Mauritius, Singapore and Cyprus, gaining taxation rights over capital gains to plug loopholes commonly exploited to evade taxes.

India, along with 67 other countries, signed a multilateral instrument in Paris last year for taxpayers to prove that tax avoidance was not a principal purpose for setting up a structure in a particular jurisdiction or undertaking a transaction in a particular manner.