1. Plenary 1
BEPS Action – 1, Report on Digital Economy - PE issues and impact on developing countries
April 27, 2018
IFA, New Delhi

2. Plenary 1 April 27, 2018 IFA, New Delhi
Mr Dinesh Kanabar, Dhruva Advisors LLP (Chairman)
Mr Akhilesh Ranjan, Joint Secretary (Foreign Tax), Government of India
Mr Gyaneshwarnath (Gary) Gowrea, Head of Structuring and Advisory, SGG Mauritius
Mr Pranav Sayta, Ernst & Young LLP
Ms Shefali Goradia, Deloitte Touche Tohmatsu LLP
Mr. Amar Mehta, Indi-Genius, Canada
April 27, 2018
IFA, New Delhi

3. OECD Interim Report and other International Developments

4. International consensus – a challenge?
OECD’s interim report
Digital MNEs are modifying their business structures
US tax reforms impact needs to be monitored
Further work to be performed on nexus, profit allocation, value contribution and testing feasibility of options
No consensus on interim and unilateral measures
Final report to be published in 2020
Unilateral measures – EU, UK, etc
Possible to implement an international solution without US participation?

5. Is it a Source v Residence debate?

6. Digitalization of Businesses

7. Permanent establishment (‘PE’)
Both OECD & UN Model – if there is PE, then tax has to be paid on the profits attributable to that entity.
Physical PE: Fixed place of business through which the business of an enterprise is wholly or partly carried out
Two types of PE
Dependent agent PE: Exists where a person acting on behalf of the enterprise and habitually exercise an authority to conclude contracts in the name of the enterprise
The PE definition excludes warehouse, …. And any structure solely for the purposes of carrying on any other activity of a preparatory or auxiliary character.
The traditional view is that one should be dealing in G+ S
But what happens in a digitalised world?
In the digital world one can conclude contract without physical presence nor with the need to have a DAPE

8. Did Google Ireland have a P/E in France Lack of physical presence
Google case
IRELAND
Google
(Ireland)
Service Agreement
Cost plus basis
Sell digital services
France
Clients
Google
(France)
700 employees
Extent of the tax claim:
From 2005 – 2010
Euro 1.1 billion
Circa US$1.64 billion
French tax authorities argued that the French employees were instrumental in selling the advertisement space even if the contracts were made with the Irish subsidiary
Did Google Ireland have a P/E in France
Lack of physical presence
Held that:
French Tax Authorities did not have a P/E
Could not collect corporate tax or withholding tax from Google Ireland
Other taxes such as VAT did not apply

9. Taxing Digital Economy - India’s take

10. Taxing the digital economy – India’s take (1/4)
Equalisation Levy
Effective from June 1, 2016
Applies on payment to non-residents not having a PE in India
Presently applies on payment for online advertisements / provision of digital space
6% of gross payment
Payment subject to EL- exempt from income tax [section 10(50) of Income-tax Act, 1961]
Revenue collected by India from June 2016 to March INR 3.4 billion (source: OECD Interim report on Tax Challenges Arising from Digital Economy)

11. Taxing the digital economy – India’s take (2/4)
Online Information Database Access and Retrieval Services (‘OIDAR’)
GST at 18%
Applies on services provided through the medium of internet and received by recipient online without having physical interface
Advertising on internet, providing cloud services, providing e-books, digital data storage, online gaming

12. Taxing the digital economy – India’s take (3/4)
India’s Observations on 2017 draft OECD MC and Commentary
Right to include Significant Economic Presence (‘SEP’)
Website may create a PE
PE if opening of website on equipment results in download of automated software, such as cookies for collection of data

13. Taxing the digital economy – India’s take (4/4)
SEP introduced in domestic tax law – S. 9 Business Connection
SEP shall mean:
transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transactions during the previous year exceeds prescribed amount; or
systematic and continuous soliciting of business activities or engaging in interaction with prescribed number of users, in India through digital means.
Whether or not
Agreement for such transactions or activities is entered in India; or
The non-resident has a residence or place of business in India; or
The non-resident renders services in India.

14. Equalisation Levy - Issues under consideration

15. EL: Issues under consideration (1/2)
Has EL achieved its objectives?
Is EL an interim measure?
How does EL interact with SEP?

16. EL: Issues under consideration (2/2)
Compliance with international obligations under tax treaties?
Any scope to include in bilateral treaties?
Scope likely to be expanded to include other services?

17. Significant Economic Presence - Issues under consideration

18. SEP: Issues under consideration (1/7)
“transaction in respect of any goods, services or property carried out by a non-resident in India…”
Interpretation of “carried out in India”? Litigation?
Doing business in India vs Doing business with India?
Application to transactions in physical goods?
Sold through digital means
Sold through non-digital means
Uncertainty and litigation for physical goods?

19. SEP: Issues under consideration (2/7)
“transaction in respect of any goods, services or property …” “Whether or not….the non-resident renders services in India”
Source taxation of non-technical services?
Interaction with payments covered under S. 9(1)(vii) of the Income-tax Act, 1961?

20. SEP: Issues under consideration (3/7)
“…including provision of download of data or software in India”
Interaction with payments covered under S. 9(1)(vi) of the Income-tax Act, 1961?

21. SEP: Issues under consideration (4/7)
“systematic and continuous soliciting of business activities or engaging in interaction with prescribed number of users, in India through digital means”
Active solicitation vs passive solicitation?
Scope of interaction?
Tracking of users?

22. SEP: Issues under consideration (5/7)
Obligation of foreign companies that don’t have a PE under tax treaty?
Practical difficulty in obtaining SEP related information from non-residents?
42% WHT inevitable?
Gross-up?

23. SEP: Issues under consideration (6/7)
Fate of existing litigation on website PE?
How will data regarding revenue and users be collected?
Attribution rules?

24. SEP: Issues under consideration (7/7)
Value creation on account of data, user participation, network effects and user-generated content?
Consider waiting until international consensus is reached?

25. Closing Remarks