OECD’s new plan will tax MNEs, digital businesses higher, and in more markets

The OECD has come up with a new proposal that if implemented will result in global shake-up of corporate taxation and also address the tax challenges of the digitalisation of economies. This proposal could grant new taxing rights to the countries where users of highly digitalised business models are located.

It would prevent the tech giants, especially FAANG — Facebook, Apple, Amazon, Netflix and Google — from easily shifting their profits around the world to minimise tax bills.

‘Unified approach’

In a new consultation document, the OECD has come up with a “unified approach” for taxation of digital businesses. This is quite significant and in line with what Central Board of Direct Taxes in India (CBDT) has been wanting to do. If implemented, this could vastly increase the tax base of countries like India and extract more corporate tax from multinational enterprises (MNEs) irrespective of whether they are digital or highly profitable consumer product makers, such as car companies and luxury goods producers.

The OECD report proposes to apply a new formula for residual profits. While market jurisdictions get greater rights over residual profits based on a formula system, the arm’s length principle (ALP) will continue to apply for routine profits. The unified approach aims to complement the ALP with a formula-based solution for market jurisdictions while leaving the existing transfer pricing (TP) rules in place, say tax experts. This would mean the proposal would be a second layer on top of the existing TP regime, they added.

Most importantly, the scope of the new proposal extends from just digital business to all consumer facing business. “This is a very significant expansion and seems to be an acknowledgement of what India has asserted all along, that the market is an important component and deserves to be a factor for profit allocation,” Rohinton Sidhwa, Partner, Deloitte India told BusinessLine .

Foreign companies advertising consumer goods for sale in India could be exposed to tax if they satisfy a nexus test as well as a sales threshold, he said. Currently, only the import of goods were subject to customs duties for such companies. Now, the provisions could also trigger a tax presence for such businesses.

Ajay Rotti, Partner, Dhruva Advisors LLP, said that the most important aspect is that the report proposes creation of new rules to ensure that multinational enterprises conducting significant business in places where they do not have a physical presence have to be taxed in such jurisdictions. “It moves away only a physical presence and suggests sales to be a nexus for taxing rights. This is in line with the proposal put out by the CBDT in the paper on profit attribution,” he said. The CBDT proposed a formulatory apportionment with sales being one of the factors to determine taxable profits. The OECD report adds strength to the position proposed to be adopted by the CBDT. It differs only to the extent that CBDT had proposed a move away from theALP concept while the OECD report states that new rules have to coexist with the ALP concept. “This will be a very interesting space to watch since any changes by the CBDT would impact all the MNCs operating in the digital space in India including Google, Amazon, Facebook, Netflix,” Rotti said.

SR Patnaik, Partner & Head, Taxation, Cyril Amarchand Mangaldas, said “The implementation of Unified Approach would have significant positive impact on a consumer heavy tax jurisdictions like India considering that not because of the digital presence, but from the customer base it is generating tax revenue for India”.

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