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Organisation for Economic Cooperation and Development (OECD) (Mint)
Organisation for Economic Cooperation and Development (OECD) (Mint)

Row over levies on digital economy firms threaten to derail India-US ties

  • Friction over digital tax to influence India-US ties in coming months
  • If there’s no consensus on tax rules, a trade war could wipe out 1% of global growth every year, OECD estimates

A tussle between India and the US over an emerging area of corporate taxation is expected to play out in the coming months as the US elections, the pandemic and fiscal stress of governments impact negotiations for a new global order in taxing tech giants, said experts.

With the talks on a more equitable global tax rules covering mostly US tech giants still inconclusive, countries, including India, have been taking unilateral steps that have pitted them against Washington.

India ran into a US trade probe earlier this year after New Delhi, like many European nations, including the UK and France, went ahead with a plan to step up taxes on offshore digital economy firms which access a local consumer base electronically.

The 2% tax on e-commerce that New Delhi introduced in April was an expansion of the “equalisation levy" that had been in place since 2016. Equalisation levy was originally meant for non-resident tech firms such as social media platforms for hosting online ads targeting Indian consumers.

With India and many EU nations introducing their own taxes, the Trump administration in June suspended talks and warned of retaliatory measures. India maintains equalisation levy on e-commerce is a fair, reasonable and non-discriminatory tax aimed at all offshore digital economy firms accessing the local market, and is not aimed at American corporations alone. India also said in its response to US Trade Representative’s (USTR’s) initiation of a probe into the tax that it was consistent with global tax treaties and the World Trade Organization (WTO), Mint reported in July.

Consensus about the new global tax rules was to be reached by end-December 2020, but the pandemic and US elections have forced the Organisation for Economic Cooperation and Development (OECD), a group of 37 nations, to push the deadline further, said Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP, a professional services firm.

“Consensus is expected to be reached by mid-2021. The US elections have significant impact on the consensus since the regime under President Trump was very severe on countries proposing to tax the tech companies and in case of countries levying unilateral levies, sanctions and other actions have been initiated or contemplated." In case a consensus is not reached, OECD expects a trade war that could wipe out 1% of global growth every year, Vijayasarathy said.

Enhanced public spending requirements and reduction in tax receipts in the wake of the pandemic is forcing individual nations, including India, to step up efforts to check the erosion in their tax base on account of tax avoidance by multinational companies. Tax avoidance entails aggressive tax planning and shifting of income from markets where value is created to the books of subsidiaries set up in low-tax countries through complex transactions.

Experts said if the US election brings a regime change, it could mean a transformation in the approach to global talks on the digital economy. “Overall, the choice of US voters will definitely impact the way negotiations will be unlocked at the OECD level in the coming years," said Sandeep Jhunjhunwala, partner, Nangia Andersen LLP, a consultancy.

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