India won't make sovereign commitment on future digital services tax

May delay implementation of global tax deal

In a move that could delay the implementation of a global tax deal, India and other developing countries under the G24 grouping have objected to the proposal of making sovereign commitments to not introduce any future digital services tax like equalisation levy. The developing countries are of the view that any commitment to not enact future measures should be in the nature of political commitments only.

“We should be conscious that any commitment beyond a political commitment will effectively constrain future law-making powers of sovereign jurisdictions. Setting such a high legal bar runs the risk of undermining the consensus solution that the current work aims to achieve and will raise constitutional concerns in various jurisdictions,” according to the comments submitted by the grouping on the Pillar One progress report released by the Organisation for Economic Co-operation and Development (OECD) Secretariat last month. “For these reasons, we strongly urge that any commitment from jurisdictions to not enact future measures should be in the nature of political commitments only.”

Akhilesh Ranjan, advisor (tax policy) at PwC, said chances of the deal getting implemented were very remote within the timeline, and it might be pushed back by one year. 

“The agreement was made on a broad framework talking about the allocation of profits, threshold, etc. At that point, they agreed to the required criteria. The reason why they (G24) are raising it now probably is that the US does not appear to be in favour of this Pillar one. It (US) is yet to even sign Pillar two on the minimum tax. In that case, the developing nations do not want any bindings which are against their sovereign rights,” Ranjan said.

An email sent to the finance ministry spokesperson did not elicit a response till press time.

The global tax deal, agreed upon by 137 countries in October 2021, gives rights to countries, including India, to tax digital players such as Google, Facebook, and Netflix, besides setting a ‘global minimum corporation tax’ of 15 per cent. It is expected to be implemented from 2024 under a revised timeline.

Tax tussle

• Two-pillar multilateral solution agreed upon by 136 nations, including India, in Oct 2021
• Pillar 1 deals with reallocation of additional profit share to the jurisdictions where users are located
• Companies with €20 billion revenues and a profit margin above 10% to be taxed 
• The second pillar relates to a global minimum tax at 15% 
• Emerging markets have demanded that withholding taxes be kept out of global deal or else it might hit their revenues

Under Pillar One of the deal, all signing countries are required to withdraw their existing digital services taxes and other unilateral measures with respect to all companies and also commit not to introduce any new unilateral measures in the interim period.

India first brought into force a 2 per cent equalisation levy in 2016, targeting offshore e-commerce firms hosting advertisements aimed at Indian consumers. However, the US threatened to impose retaliatory tariffs on Indian exports, alleging the equalisation levy discriminated against the US companies and was inconsistent with principles of international taxation. However, both countries reached a deal in November last year under which India agreed to phase out the levy by the time Pillar One of the global tax deal is implemented or March 31, 2024, whichever is earlier.  

In their latest submission, the G24 grouping also raised concerns about counting withholding taxes within the proposed deal. “G24 is of the considered view that any consideration of withholding taxes in Pillar One will lead to erosion of existing taxing rights and will make it unattractive and meaningless for the developing countries,” the grouping said.

Withholding taxes are levied in respect of a limited set of payments only and there cannot be any presumption that they are related to residual profit only, the G24 grouping noted. “The developing countries have already made many compromises including a low percentage share of residual profits and high revenue threshold for in-scope companies and therefore, any consideration of integration of withholding taxes is a cause for serious concern,” it held.

Another strong objection of G24 countries was on outsourcing audit functions to independent experts in the proposed dispute resolution panel. They pointed out that panels are expected to be privy to very sensitive non-public information of the largest and most profitable companies of the world and the group is concerned about the confidentiality, impartiality and conflict of interest of such independent experts.