New Delhi: India may be looking at different options to tax major digital entities such as Google, Netflix, and Facebook, as hinted by Finance Minister Arun Jaitley while announcing this year’s Budget. However, considering the fact that it is a tedious process to renegotiate tax treaties, the centre is looking at base a multilateral instrument (MLI) to implement the fresh tax related framework, without amending individual bilateral treaties, reports The Business Standard.
The report also says that India may propose the new condition under the international tax framework of the Organisation for Economic Co-operation and Development to tax internet majors operating in the country. It may be noted that in the year’s Budget, the government has shown interest to tax digital entities or business with a large pool of users by proposing to amend the Income Tax (I-T) Act.
However, there seems to be one major problem ahead of the government owing to double taxation avoidance agreements (DTAAs), which will not be covered under the proposed change, thus indicating that in order to tax Facebook, Google or Netflix, India is required to renegotiate tax treaties.
As mentioned earlier, renegotiating tax treaties with the US is a tedious tax, and it may take years to strike a deal, as observed earlier in 1989. Commenting on the issues, a senior government official admitted that “amending” another treaty with the US is difficult unless it too wants to introduce this provision.
He went on to say that India would consider itself lucky if a treaty is signed in this regard with the US in another five years. It may be noted that major digital companies will only fall under the tax net if existing treaties are reviewed or new ones are signed again – both are uphill tasks which would require years.
The report also mentions that the MLI will automatically amend the bilateral tax treaties shared by India and US to include the taxation provision for digital businesses, thus avoiding the burden of separately negotiating existing treaties. At present, India has DTAAs with as many as 82 nations.
The senior tax official also insisted that there be an MLI on digital taxation. While there is a possibility that a ground foundation could be laid for the norm, if other countries come together, the process will still take at least three years. Further, some of the countries may have reservations on particular provisions of the MLI.
It may be noted that the taxing of digital entities is also being considered in the base erosion and profit shifting (BEPS) framework, which aims to check cross-border tax evasion by global companies exploiting existing tax treaties.
For India’s plan to meterialise, other countries are also required to push for it in the BEPS framework. As per the amendment proposed by FM Jaitley in the Budget, the I-T Act will provide significant economic presence in India apart from constituting a business connection.
The senior official went on to say that various stakeholders will be consulted for the guidelines and implementation of such a taxation measure. While the government has made its intentions clear, no digital companies have commented on the whole issue.