The OECD plan for the new approach to taxation of MNCs is likely to become a reality once participating countries incorporate it in a multilateral deal signed in 2017 (iStock)
The OECD plan for the new approach to taxation of MNCs is likely to become a reality once participating countries incorporate it in a multilateral deal signed in 2017 (iStock)

What OECD’s tax plan for tech giants means for India

  • OECD has proposed that profits of MNCs should be available for taxation in the country where their customers are, irrespective of any physical presence in that market
  • A formula should be evolved for such taxation

New Delhi: Organisation for Economic Cooperation and Development (OECD), the club of industrialized nations, on Wednesday unveiled a new global approach for taxation of multinational companies, especially technology giants like Google and Facebook. Mint takes a look at what it means for India.

What is the new proposal for taxation of MNCs?

OECD has proposed that profits of MNCs should be available for taxation in the country where their customers are, irrespective of any physical presence in that market and that a formula should be evolved for such taxation. This marks an effort by governments to catch up with the business models of new age companies that can deliver services through internet in markets where they do not have physical presence and hence cannot be taxed efficiently under existing rules.

What is the gap in India’s income tax regime?

India levies tax on the global income of companies incorporated here including subsidiaries of foreign companies but in the case of non-resident companies that operate through branches, only the income generated in India is taxed. In the case of non-resident companies that receive fee for technical services and royalty from Indian entities, taxes are levied in India to the extent India’s tax treaties with their home countries permit. When it comes to digital economy firms, attribution of profits for taxation gets difficult as they do not have a physical presence (‘permanent establishment’ in tax treaty parlance) here in the conventional sense. Attempts to tax these companies under existing provisions leads to litigation. The unified approach to taxation of MNCs proposed by OECD is a win-win for all and will bring certainty in taxation to companies, according to Shefali Goradia, partner at Deloitte India.

How does OECD plan impact India?

The OECD plan fills a major void in India’s ability to tax offshore technology firms such as video streaming and social media companies that have a big market presence in India. India made a beginning in 2016 to tax such companies by introducing a 6% tax on the money paid to these companies by Indian advertisers. Revenue from this tax called the equalization levy has been growing sharply since its introduction, but it covers only a small part of the digital economy. India also proposed in Finance Act 2018 that such offshore firms should be taxed in India if they have a market presence above a threshold to be defined in terms of their customer base and revenue. However, this needs an amendment to India’s tax treaties, an arduous process. The OECD plan, which subsumes India’s proposal, makes taxation of digital economy easier. According to S R Patnaik, partner and head of taxation at Cyril Amarchand Mangaldas, a law firm, implementing the unified tax approach would have “significant positive impact on consumer heavy tax jurisdictions like India."

How will the new plan be implemented?

The OECD plan for the new approach to taxation of MNCs is likely to become a reality once participating countries incorporate it in a multilateral deal signed in 2017 to amend all bilateral tax treaties of the signatory nations. This is expected to happen by 2020-21. (ends)

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