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India poised to lead global push to tax tech giants in digital age

NEW DELHI — The US$21m (S$27.6 million) fine levied on Google by India’s competition watchdog for abuse of market dominance was just one-hundredth the size of that imposed last year by its counterpart in Brussels.

India poised to lead global push to tax tech giants in digital age

Participants of a Google India initiative to make internet a safer place. New Delhi is looking at how to increase tax revenue from tech giants such as Google. Photo: Twitter / Google India

NEW DELHI — The US$21m (S$27.6 million) fine levied on Google by India’s competition watchdog for abuse of market dominance was just one-hundredth the size of that imposed last year by its counterpart in Brussels.

Yet this month’s penalty appears to be just a prelude to New Delhi securing a greater share of the revenue of United States digital giants, some of which have hundreds of millions of users in India but report only a tiny portion of their profit there.

The push could also see India taking a leading role as global governments struggle to decide on a system for taxing multinational companies in the digital age.

In the parliamentary bill accompanying this month’s annual budget, New Delhi said it would amend its tax law to state that companies would be considered to have a “significant economic presence” — and therefore be liable for income tax — if they engage digitally with a prescribed number of users, regardless of their physical presence in India.

The new approach will not take immediate effect, thanks to India’s bilateral tax treaties with the US and other nations, which forbid double taxation.

But tax experts say it is an opening salvo in an Indian campaign to secure a larger slice of the value that Google, Facebook and other digital companies generate, by renegotiating those treaties.

“India has taken a lead on this,” says Amit Maheshwari, managing partner of Ashok Maheshwary & Associates, an accounting firm.

“They’ve given a message to everyone: this is what our stand is, and based on this, we will renegotiate the treaties.”

The question of how to assess the tax owed by global digital companies in various countries has become one of the most fraught topics in international efforts to overhaul the global tax regime, spearheaded by the Organisation for Economic Cooperation and Development.

“When certain taxpayers are able to shift taxable income away from the jurisdiction in which income producing activities are conducted, other taxpayers may ultimately bear a greater share of the burden,” the OECD wrote in a 2015 report.

While the potential for such moves was “not unique to digital businesses, it is available at a greater scale in the digital economy than was previously the case”, it added.

In India and many other markets, companies such as Google operate a “re-seller” model — meaning that the local entity is nominally separate from the parent company, and pays hefty fees for the right to use its intellectual property and supporting infrastructure.

That payment is typically made to a subsidiary in a low-tax jurisdiction such as Ireland or Singapore. The system means that the profit margins of the Indian subsidiaries, which pay tax to New Delhi, are far lower than at their parent companies.

While India last year became Facebook’s biggest user base with 241 million accounts, its reported revenue in the country in the financial year ending March 2017 was just 0.2 per cent of its global total, at Rs3.4billion (S$69.6 million). It reported a net margin of 12 per cent on that sum, compared with 38 per cent for the parent company.

Google India’s net profit in the 2016 financial year — the latest for which it has reported earnings — was just 4 per cent of its US$917m revenue, compared with an overall net margin exceeding 20 per cent for the US parent company, since renamed Alphabet.

Google declined to comment. A person working in the Asian operation of one leading US digital company said this reflected the fact that the bulk of the value addition behind its Indian service took place outside the country — through the research of engineers in the US, or infrastructure installed around the world at huge cost.

But under the proposed new system, Mr Maheshwari said, the US-based parent companies themselves may be deemed to have a “permanent establishment” in India, paving the way for the government to seek a share of their global profits.

India had already imposed, in 2016, an “equalisation levy” of 6 per cent on digital advertising payments to foreign companies. But Mr Maheshwari said the new regime might extend the government’s grip beyond the revenue the companies earn by selling advertising in India, to income from global sales of advertisements that are seen in countries including India.

Rakesh Jariwala, a partner at Ernst & Young, said that India could face resistance to its plan from Washington, which would stand to lose out on tax revenue from the tech multinationals if New Delhi were to increase its take.

But he noted that other countries have also been pressing for higher tax payments from the companies. British chancellor Philip Hammond said in November that the UK would tax, from 2019, royalties relating to UK sales that are paid to entities in low-tax jurisdictions — a move tax experts saw as targeting primarily technology companies.

This month, French finance minister Bruno Le Maire suggested a new EU tax regime for multinational technology companies be created by next year, saying: “It’s not possible, not sustainable, that we tax manufacturing industries while billions in profits earned by [US tech giants] on European soil evaporate.” “This is part of a global movement,” Mr Jariwala said. “Countries are feeling the heat as their tax base is eroded.” THE FINANCIAL TIMES

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