Study bats for OECD multilateral approach to tax digital services

Paper by Shardul Amarchand Mangaldas and Jindal Global Law School opposes digital service tax, currently imposed by individual countries, such as equalisation levy by India

A study paper, recently submitted by Shardul Amarchand Mangaldas and Jindal Global Law School to the Niti Aayog, argued in favour of OECD's multilateral approach to tax digital services, on which negotiations between the nations are expected to conclude on Friday. It opposed digital service tax (DST), currently imposed by individual countries such as equalisation levy by India and questioned the practicality of UN and G-24's approach to tax these services.  

The paper, co-authored by Gouri Puri, partner at Shardul Amarchand Mangaldas and Kinshuk Jha, associate professor and executive director, Centre for Comparative & International Taxation, Jindal Global Law School, said India's  commitment to the multilateral solution will help in promoting tax certainty in India.

The paper, titled 'Addressing Tax Challenges of Digitalisation: Exploring multilateralism as the way ahead for India, said India’s commitment to a multilateral solution will signal to foreign investors the country's willingness to adopt internationally agreed standards that foster tax certainty for businesses and increase the

predictability and stability of its tax system.

This will also bring more clarity and policy coherence in how India addresses tax challenges to digitalization and implements these rules, the paper opined.  

"In comparison, having several disjointed DSTs or bilaterally negotiated taxes that are implemented with no international cooperation can cause significant uncertainty for both MNEs (multinational enterprises) and governments," said Puri.

Given that equalisation levy (EL) is not creditable overseas and entails compliances costs, several players have passed on the increased cost of doing business to consumers.

"Increase in prices of goods and services impact all consumers, including SMBs (small and medium businesses) and start-ups. As such DSTs may not be an optimum solution in the long run when compared with a tax on business profits, which alleviates double taxation as is proposed by Pillar One approach of OECD, Puri said.

The paper said many of the Indian start-ups and unicorns are eyeing foreign markets and are building their global user base for instance Ed-tech giant Byju’s is aiming to become one of the largest players in the space in the US, with a target to hit revenues of $ 1 billion in the next three years. Similarly, Ola, Swiggy, Practo, Wittyfeed have all expanded their businesses to foreign markets in the last two years.

India therefore has an interest in protecting its start-up and tech ecosystem that has a growing global user base from foreign DSTs.

"A multilateral solution will be key to stop the proliferation of DSTs globally. The tax policy that India frames today as an emerging economy will also impact her future as an exporter of digital goods

and services and therefore, it is important to evaluate both sides of the coin," Puri said.

Besides, the proliferation of DSTs absent a multilateral consensus on addressing tax challenges of digitalization can trigger a global trade war, she said. In response to DSTs, US has already launched USTR 301 investigations against France, India, Italy, Turkey, Austria, Spain, United Kingdom, Czech Republic, European Union and Indonesia, she said to buttress her view point.  

Puri said India’s commitment to a multilateral solution may also facilitate India’s ongoing trade deals with other allies, such as the UK, US and EU. "On the other hand a trade war or a decline in international trade relations could be a major setback for businesses, investments flows and the Indian economy, which is eyeing a $

1 trillion target for exports by 2025," she said.

Comparing OECD approach to UN's UN’s Article 12B, the paper says the latter looks to offer a simpler solution

by allowing market jurisdictions to levy a withholding tax on the gross amount of automated digital services (ADS) income.

From a practical standpoint, however, the UN approach’s Achilles heel is that it relies on a bilateral approach to amend India’s existing double tax avoidance agreements. The UN approach therefore seems impracticable absent the political will of India’s key tax treaty partners to come on-board, it said.

Admittedly, India’s preferred approach for addressing the tax challenge of digitalization was G24’s proposal to amend the definition of permanent establishments (PEs) to include significant economic presence, and thereafter allocate profits based on a fractional apportionment method (that factored in sales).

"However, achieving this outcome was not possible without a consensus among all nations. Against this backdrop, India opted in for OECD’s unified approach," it said.

Much water has flowed under the bridge since the G24 proposal, the report said, adding India is a leading member of the Inclusive Framework and is actively and vocally shaping Pillar 1 negotiations alongside the OECD countries.  

The Pillar-1 proposal talks about taxing companies with 20-billion-euro revenues and a profit margin above 10 per cent, which will be reviewed after seven years to cut the threshold to 10 billion euros. This is much higher than the 1-billion euro revenue threshold pressed by developing countries to cover 5,000 global companies.