The Way to Tax Global Digital Giants

Context: Recently, the Organisation for Economic Cooperation and Development’s (OECD) proposed new framework estimates having $100 billion a year of additional corporate profits being available for taxation in jurisdictions such as Europe and India. 

Issue with taxing the global digital giants:

• Globalisation and the rise of the digital economy: has intensified the problem of Base Erosion and Profit Shifting (BEPS)

• Political differences stemming mainly from the United States: have stalled the global consensus on taxing digital; companies.

The recently proposed framework by OECD: based on two pillars:

• Pillar 1: 

• Apportions global profits to the countries in which their users are located, 
• Based on the principle that companies must pay tax in every market where they generate value and make profits. 

• Pillar 2: 

• It would be an effective minimum corporate tax rate that every MNC would have to pay, which would be redundant if Pillar 1 is made effective. 

India’ Stand:

• India, an active participant in BEPS, wants the OECD to
• Define a new taxing nexus and significant economic presence;
• Frame rules to allocate income to that nexus based on gross sales revenue and overall profitability of the enterprise, not just allocate residual profits. 
• India charges an equalisation levy on online ad payments to foreign entities and on non-resident e-commerce operators without a permanent establishment here. 

Conclusion: India being an active participant in BEPS, wants the OECD to define a new taxing nexus, significant economic presence, and frame rules to allocate income to that nexus based on gross sales revenue and overall profitability of the enterprise, not just allocate residual profits.