India will start charging income tax on digital economy firms, such as Facebook, Twitter and Uber, soon after the OECD finalises a framework by April 2015 to tackle the widespread corporate practice of shifting of profits to low-tax countries, government officials said on Wednesday.
Tax may be levied on overseas firms that have a ‘significant digital presence’ in the country by treating their domestic activities as ‘a virtual place of business’ akin to permanent establishment.
“There are millions of users for some of the digital economy firms here. There must be some attribution of that value here,” said a government official.
New Delhi, which is actively participating in the project on ‘tax base erosion and profit shifting’ will implement the proposals after a multilateral agreement for taxation of digital economy firms is signed. Taxation of digital economy firms is part of the larger goal of checking the shifting of profits to other countries for tax purposes.
The UK on December 3 announced a 25% tax with effect from April 2015 on profits that big companies make in that country but are ‘diverted’ to low-tax countries.
Some experts, however, are of the view that the economic activity of such digital firms in India only leads to a higher valuation of their business, not income, and, hence, charging them to tax would be a challenge.
The proposed multilateral deal would also lead to a massive change in the way MNCs report their global activities to tax authorities and the way specific transactions are chosen by tax officials for audit.
Once a country-by-country reporting of corporate operations is compulsory, cross-border transactions of companies would be chosen less randomly and in a non-intrusive manner to ascertain if there is any understatement of income as the authorities will have access to all relevant details to make the right judgment.
Akhilesh Ranjan, joint aecretary in the finance ministry handling international taxation, said at a tax conference organised by CII that the country-by-country reporting requirement would actually reduce the compliance requirement of companies. “We will use the data for a thorough risk-based auditing,” said Ranjan. India has already moved away from compulsory audit of every cross-border transaction above Rs 15 crore to a more selective approach of risk-based auditing. Ranjan said that the finance ministry has set up a team of officials to select transactions for auditing specifically going by the risk of revenue leakage.
Revenue secretary Shaktikanta Das said the government was renegotiating many bilateral tax treaties to check illicit financial flows across borders.
