A budgetary proposal to tax multinationals with a substantial user base in India such as Google and Facebook is now being widened to include non-digital companies. This could mean that any company that merely sells goods or services in India could see domestic taxes of up to 42% on their profits.
The government is planning to introduce rules to effect the change proposed in the budget in the coming weeks, reported the sources close to the government. Many tax experts fear this could impact several multinational companies that only export goods or services to India.
“The question is whether there is a tax to do business with India. If non-digital companies that merely trade with India could see their business connection/permanent establishment set in India slapped with domestic taxes, this could lead to unsettling of settled tax positions,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
According to another person with direct knowledge of the matter, the impact on non-digital companies is unintentional. “It’s very difficult to define digital companies in the regulation, and even if this is done, there is a fear that this could be misinterpreted or exploited by several companies,” he said.
“Why should companies that earn billions from India or have potential to do so be not taxed in the country? The definition of permanent establishment has to change in the current environment, where several multinational companies operate through a complex maze of subsidiaries and tax structures,” stated the expert.
Tax experts said India could be looking to introduce this even in the existing tax treaties with other countries.
“The consultative process should result in a model that could apply to the digital economy but is not misused in the brick and mortar businesses. Drafting of the rules must be water tight so that the rules don’t get misused and any company that merely trades with India doesn’t get burdened with tax at 42% on net profit method,” said Vijay Iyer, national leader, transfer pricing, EY India While the focus is on multinationals operating in India through tax havens, the government could look at negotiating tax treaties with several countries. This could multilateral instruments (MLI) or bilateral negotiations. MLIs are basically common tax agreement which could lead to uniform tax regulations for all investors, irrespective of which destination they come from. MLIs are part of the base erosion and profit sharing (BEPS) framework.
“The applicability of the ‘significant economic presence’ rules may not have immediate impact since tax treaties wouldn’t still govern most structures. However, the government may use this provision to initiate a conversation in multilateral forums like OECD and for bilateral tax treaty negotiations,” said Iyer.
Source: Economic Times