The COVID-19 pandemic has brought to the forefront, the focus on the rapidly growing shift to a digitalized economy across the globe. While a paradigm shift toward digitization of the economy was already underway, pandemic has only accelerated it. The lockdowns imposed by governments worldwide has pushed many companies onto online platforms, e.g., TV broadcasters launching their own OTT platform to meet the rising demand of entertainment services. At the same time, the breadth and speed of this change introduces challenges in many policy areas, including taxation. Digitalization and related new phenomena such as the collection and exploitation of data, network effects, and the emergence of new business models, has a wide range of implications for taxation, impacting tax policy, and tax administration at both the domestic and international level. This increase in digitization of delivery of goods and services, and the pressure on nations to generate revenue to revive the economy raises a strong demand to effectively tax digital companies.
To this end, through the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), 137 countries have been working together on proposals to address the tax challenges arising from the digitalized economy, though a global consensus is far from sight. In the absence of multilateral consensus, many jurisdictions have begun to formulate unilateral rules to tax the digital economy, which can increase the tax burden of digitalized businesses operating internationally due to double or multiple taxation, reduces tax certainty and could undermine the relevance and sustainability of the international tax framework.
Pending consensus, India has been one of the early adopters of the unilateral measure discussed by OECD in its BEPS (base erosion and profit shifting) action plan 1. Some of the measures adopted by Indian government to tax foreign digital service companies, includes – Equalization Levy (EL) and Goods and Services tax (GST).
In addition to the above, the recent Finance Act 2020 also introduced 1 percent WHT obligation on payments made by an e-commerce platform owner/operator to Indian resident selling their goods/services using the online platform of the e-commerce platform owner/operator.
Internationally, countries like Austria, France, Italy, Romania, Spain, UK, and few others have introduced a flat rate of Digital Service Tax (DST) ranging from 2 percent to 7.5 percent on digital service like online advertising, provision of an online platform, and multi-sided digital interface primarily allowing users to interact, sell goods or provide services to one another, management and transmission of user data, etc. There are others like EU, Hungary, and others who have proposed similar legislation. Though most of these countries have indicated that DST is restricted to specific sectors and an interim measure pending any bilateral/multilateral reforms. Countries like the US and China have not actively supported introductions of such digital taxes.
While the unilateral measure means a source of tax revenues for nations, which is crucial in these times, it also means uncertainty and risk of multiple taxation. Recently, the OECD has proposed consensus-based multilateral solution comprising of two pillars – Pillar One focused on nexus and profit allocation, whereas Pillar Two is focused on a global minimum tax intended to address remaining BEPS issues. The UN has proposed amendments to bilateral tax treaties which will allow tax on income from automated digital service on a gross basis at the rate negotiated bilaterally, with an option to the taxpayer to pay tax on a net annual profit basis.
Though a complete consensus to tax the digital economy may look challenging, the proliferation of unilateral measures may push countries to move faster toward a globally acceptable multilateral/bilateral solutions, especially considering the possibility of multiple taxation with EL/DST operating in multiple countries.