G20 agreed to Digital Tax

G20 agreed to Digital Tax

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Finance Ministers of G20 agreed to digital tax.

Digital Tax

• A new tax model that is adapted to the digital economy.

• Under the system, digital companies like Amazon, Facebook, Google etc. will be taxed on the basis of,
– Their revenue and
– Number of users in every market where they operate.

• Presently, these companies are taxed on the basis the location where they are headquartered.

Need for the Digital Tax

• The present taxation system has loopholes that global technology giants such as Facebook use to reduce their corporate taxes.

• For cutting their tax bills Tech companies book their profits in low-tax countries regardless of the location of the end customer.

• Ever growing and rapid digitization created a need for countries to develop a framework to regulate and to get a ‘fair’ share of taxes from the revenues generated by such businesses.

• Loss of revenue for some governments: According to the Organisation for Economic Growth and Development (OECD) estimate in 2015, the present taxation system has cost governments up to $ 240 billion.

Progress Made in this Direction

• The OECD first released an ‘Action Plan’ to address the challenges of the digital economy.

• Since then the organization has been working relentlessly with an intention of developing the consensus based long term solution by 2020.

• In 2019, the OECD released a document to provide an update on the proposed solution to deal with tax aspects arising on account of the digital economy.

• Earlier in 2019, countries and territories agreed a roadmap aimed at overhauling international tax rules, which have been overtaken by development of digital commerce.

• In June 2019, G20 nations have agreed to push ahead on compiling common rules to lock tax havens’ door for tech giants.

• Steps taken by India
– Since 2016, India has been imposing Equalization Levy at a rate of six per cent on the payments made by Indian businesses to non-residents providing digital advertising services.

– In 2018, India recognized virtual presence as constituting nexus for the purpose of asserting taxing rights and introduced the concept of Significant Economic Presence (SEP) in its tax laws.

Do You Know?

The SEP is defined based on certain revenue and user thresholds, that remains to be prescribed.

Arguments in Favour

• The move will rationalize the international taxation system, to suit the needs of digital economy.

• Updating of corporate tax code would be in congruence of the spirit of OECD’s Base Erosion and Profit Shifting (‘BEPS’) guidelines.

• This can potentially have far-reaching consequences for India as well, as it has one of the largest internet users in the world.

Arguments Against

• The new rules mean higher tax burdens for large multi-national firms.

• It will make more difficult for countries like Ireland to attract foreign direct investment with the promise of ultra-low corporate tax rates.

G20’s debate on Changes to the Tax Code Focus on Two Pillars

• First pillar: Dividing up the rights to tax a company where its goods or services are sold even if it does not have a physical presence in that country.

• Second pillar: If companies are still able to find a way to book profits in low tax or offshore havens, countries could then apply a global minimum tax rate to be agreed upon.

Way Forward

• With newer technologies such as blockchain, virtual reality and artificial intelligence on the rise, the pace of digitalization is only going to accelerate. Any new legislative enactment must be fully considered, and its broader impact fully evaluated, before being implemented.

• The OECD believes that a consensus-based solution is the ideal solution since unilateral measures by countries lead to unintended double taxation or double non-taxation among other undesirable results.

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