Digital industry not governed by traditional taxation rules, says Rajendra Nayak of EY

Image result for Digital industry not governed by traditional taxation rules, says Rajendra Nayak of EYFinance Minister Nirmala Sitharaman has highlighted the urgency to fix the issue of ‘determining right nexus’ and ‘profit allocation solution’ for taxing the profits made by digital companies at the recently concluded  meeting of the group of 20 major economies. The finance ministers from the group have agreed to plug tax loopholes to keep pace with the digital age.

The two-day meeting concluded in Japan on Sunday. The group gave itself a year to take on global tech giants that use loopholes to reduce tax.

She also strongly supported the potential solution based on the concept of ‘significant economic presence’ of businesses. The concept takes into account the evidence of a company’s ‘purposeful and sustained’ interaction with the economy of a country.

According to industry experts, digital taxation remains an uphill task. “Currently the rules are very sketchy and consensus has to be developed among the members of the Base Erosion and Profit Shifting (BEPS) inclusive framework. Given that there are close to 100 countries in this forum with conflicting interests at stake, it is definitely an ambitious task to develop that consensus in a short timeframe. Nevertheless there seems to be a broad understanding that they should be a much greater taxing rights to developing countries or the countries where the market for the digital economy primarily is, countries such India and China,” Rajendra Nayak, Partner, International Tax at EY told CNBC-TV18.

“Over the last 3-4 years we have seen many unilateral measures from countries such as the UK, France and Australia and to some extent even from India. But the proposal is for two or three broad approaches. One of it is called the fractional apportionment method, which India is likely to favour, given the way we have approached the PE profit attribution about a month back. This essentially talks about allocating the global profitability based on the value of sales and other criteria such as assets which are based in the particular jurisdiction.  There are a couple of other proposals also, such as a modified residual profits split method or a distribution model, which are under consideration,” he further added.

One of the main concerns with the digital economy is that firms are able to have substantial traction or earn revenues from a jurisdiction without having a taxable presence. “If the new rules come in and there is consensus, it is likely to go in the direction to say that if there is a digital economy company, digital business model which is earning revenues from India, regardless of the fact that it has a taxable presence in India or not, some portion of its revenues needs to be taxed in India based on the user base and assets and employees which may be based in India. So this is really the broad direction in which it would go which would be a significant departure from the current international tax rules,” Nayak noted.

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