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Digital MNCs may recast operations for new tax law

Mumbai|New Delhi: Digital multinationals such as Facebook, Google, Uber and LinkedIn with operations in the country may create new domestic companies, change the ownership pattern to become compliant with new tax laws that the country may frame in the wake of a global agreement on taxation of such multinationals.

India, with other members of the Organisation for Economic Cooperation and Development (OECD), is planning to bring some of the biggest multinationals under the domestic tax net. This is set to impact the tax outgo of companies such as Facebook, Google, Twitter, LinkedIn and Uber. ET spoke to company insiders, tax consultants, lawyers and industry trackers aware of what the digital giants are doing. Currently, most of them pay tax locally on only 10-15% of the revenue generated from the country, a senior tax official told ET. Facebook, Google, Uber, LinkedIn and Twitter did not respond till press time on Friday to emails seeking comment.

According to people in the know, the concern among digital companies was that they might face tax in different jurisdictions for the same profits. “For most companies, sales in India are not as high in percentage terms as compared to other major jurisdictions. The concern is that if the tax department challenges the current tax structures based on domestic regulations, it could have an impact on the revenue from other jurisdictions as well,” said one of the people.

The government has already come out with a significant economic presence (SEP) framework whereby it can tax digital companies even if they don’t have a permanent establishment (PE) here. PE is a concept in taxation that decides where a company must pay taxes. India’s move essentially means companies that don’t even have a single employee or office in the country can be taxed.

A few months ago, the Central Board of Direct Taxes (CBDT) has come out with its own proposals and rules of how to go about taxing multinationals in India. This, as of now, is merely a proposal and will have to be notified for it to become a law, said tax experts. “Some key employees based in India who could be seen as crucial to global decision-making in the company may be relocated,” said a tax expert. This is mainly because of the fear that the tax department can pick this fact to try and prove that some global revenues too should be taxed in India, he added.

Industry trackers said while India might be lenient towards the internet giants, it could change after the new regulations come into effect. “Will the tax haven coountries be compelled to follow the OECD guidelines? China, France and Germany have shown the political willpower to tax these companies but India miserably failed to tax Internet giants despite being the biggest market,” said Virag Gupta, author of the book ‘Taxing Internet Giants’. Experts said lately India was also pushing the Internet giants to move some of their servers to India. This could also lead to tax implications, they said.

OECD’s report on taxing internet companies could vindicate India’s stand, said industry trackers. “The OECD report adds strength to the position proposed to be adopted by the CBDT. It differs only to the extent that the CBDT had proposed a move away from the arm’s-length-price concept while the OECD report states that new rules have to coexist with the ALP concept,” said Ajay Rotti, partner, Dhruva Advisors.

Source: Economic Times