Google, Microsoft, Facebook may have to share profits with India and other markets

India, along with other developing countries, will press for a gradual withdrawal of unilateral tax measures like equalisation levy or Google Tax, besides a higher profit allocation of at least 30 per cent of the additional profits of digital companies like Google, Facebook, and Netflix.

Nearly 600 representatives from 139 countries are currently engaged in hectic talks to overhaul the global tax regime to reach an agreement within the next few hours.

The two-pillar package deal will give rights to countries, including India, to tax large digital players besides setting a global minimum corporation tax of 15 per cent.

The OECD Base Erosion and Profit Shifting (BEPS) deal is intended to ensure these large multinational digital entities pay more taxes in countries where they have customers or users regardless of where they operate from. In turn, countries are expected to do away with unilateral measures.

"India will always want to negotiate a higher level of profit allocation from these entities. Besides, it will be difficult to give up on the 2 per cent equalisation levy on e-commerce players for all entities as the global tax deal will only cover the top 100 players. What about the rest," questioned a senior government official.

India's equalisation levy has a much lower annual revenue threshold of Rs 2 crore (Euro 0.2 million) against Euro 20 billion under Pillar 1 of the proposed OECD tax deal.

"Inclusive Framework meeting now on! More than 600 delegates connected…outcome of historic negotiation among 140 member jurisdictions on an equal footing to be communicated…," Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, OECD, tweeted on Friday.

Around 139 countries make up the Inclusive Framework, working on a consensus-based solution to tax digital entities that end up not paying taxes in countries from where they earn income as traditional taxation rules require a physical presence.

With the outline of the proposed global digital tax deal only covering the top 100 global companies and the allocation of only between 20 and 30 per cent of non-routine profits above a 10-per cent margin, India and other developing countries are unsure over the revenues that may flow in. Hence, they do not want to give up on unilateral taxes on these internet giants in a single go.

"The concerns of India as also of the developing world would essentially be whether and to what extent the complexity and the resources required to implement the agreed solution are proportionate or disproportionate to the expected equalisation net revenue gain," said Akhilesh Ranjan, former member, central board of direct taxes (CBDT).

He added that a policy view may also have to be taken on the manner of withdrawal of the levy and on the roadmap for further reforms to the lopsided international tax architecture.

The Pillar-1 proposal talks about taxing companies with 20-billion-euro revenues and a profit margin above 10 per cent. These largely cover the top 100 companies. The threshold will be reviewed after seven years to cut it to 10 billion euros. India and other developing nations had proposed a threshold of 1 billion euro to cover 5,000 global companies.

The OECD has estimated that developing countries are expected to gain an additional 1 per cent of corporate income tax (CIT) revenues, on average.

Meanwhile, India is hoping to make some gains from Pillar 2 of the package -- the global minimum tax of 15 per cent. It is aimed to eliminate the concept of race to the bottom in terms of tax competition. Ireland, which was till recently opposed to the proposal, also agreed to come on board last evening. Ireland has a corporate tax rate of just 12.5 per cent.

"India has raised two major concerns, which are yet to be addressed -- the share of profit allocation, and the scope of subject to tax rules," said Yashesh Ashar, Partner at Bhuta Shah & Co LLP. India should ensure that its taxing rights are safeguarded by an appropriate tax base, added Ashar.

On account of Pillar Two, the OECD has estimated that developing country revenue would go up by approximately 1.5-2 per cent of CIT revenues on average.

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