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Business News/ Politics / Policy/  The trade war that no one is talking about

The trade war that no one is talking about

At the forefront of this war are the Fabulous 5, the US technology behemoths, which are alleged of not paying adequate taxes in the counties from which they earn their revenues

Illustration: Mint

Amid the daily din of tariffs and retaliatory measures, there is another trade war that is brewing. Almost similar to the one that is being talked about, this one too is the US versus rest of the world. Differently though, at the forefront of this war are the Fabulous 5, the US technology behemoths, which are alleged of not paying adequate taxes in the counties from which they earn their revenues.

The OECD/G20 embarked on an ambitious Base Erosion Profit Shifting (BEPS) project, which was rolled out in 2015. Interestingly, among the many action plans that were released, the one related to digital taxation was incomplete, and it said that pending a global consensus, VAT/GST should be an adequate proxy for tax collections from digital transactions. Funnily, this is the one area that has seen the most developments since. Not willing to wait, almost every country in the world (other than the US of course), has introduced unilateral measures to garner taxes from digital transactions. In most cases, these measures trump the tax treaties and, hence, no relief is available. India, too, introduced an equalization levy of 6% on digital advertising transactions and has seen many countries almost copy the levy.

Earlier this year, in the hope that global consensus will be built around this vexed issue and that tax treaties would themselves be changed to bring in a broader catch-all concept of a tax presence, India had introduced a concept of significant economic presence (SEP) in its domestic law. SEP essentially states that any foreign company carrying on transactions in India in respect of any goods, services or property, including the download of data or software in India, or systematically and continuously soliciting or engaging with users in India, shall be deemed to have a taxable presence in India. On 13 July public feedback was sought to refine the tests and provide the thresholds of the value of transactions and number of users.

While there was much praise for the speed of introducing SEP, the plot has been lost. In the absence of an international consensus anytime soon (or forever perhaps), the tax treaties will not change to include a concept similar to SEP and, hence, despite the SEP provisions in the domestic law, most foreign companies will merely take shelter under the applicable tax treaty, and the entire SEP regime will come unstuck.

Moreover, in the notification seeking feedback, the essential pivot of SEP applying to digital transactions seems to have been given a go by, and it seeks comments on thresholds even for the supply of physical goods. The way technology and business models mesh today, no one, let alone a taxman, can clearly distinguish between products and services, and when a good sold digitally or physically, and so on.

Therefore, having been a front-runner and introduced SEP, to now attempt to use it as a catch-all concept, without, in any manner, clarifying the overlaps, will only result in the solution adding to the problem. Other fundamental questions such as the period over which the thresholds will be tested or the means of determining what proportion of global profits will be attributed to the presence, also remain elusive and, hence, the three tenets of clarity, consistency and certainty are yet again missing.

SEP as a concept is a game changer. It turns on its head principles of source-based taxation followed for decades. With its massive user base, there is justification for new rules to capture revenues of foreign firms earning incomes from Indian users. However, it is essential to not kill the golden goose with disconnected rules. This is only the beginning—there is more to come.

Abhishek Goenka is a tax expert.

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