digital economy symposium disruption to traditional ...€¦ · 15/08/2017 · online advertising...

DIGITAL ECONOMY SYMPOSIUM

DISRUPTION TO TRADITIONAL

INTERNATIONAL TAX NORMS

-

August 15, 2017

By: Mukesh Butani

Contents

• PE in a Digitalized World: Deemed Permanent Establishments and Digital Presence

• Taxing the Digital Economy from a policy perspective: India and China – Disrupters or Pace Setters?

• Treaties – An inconvenient truth? Australia’s Diverted Profit tax, India’s Equalisation levy

• Tax incentives for the promotion of high tech

• Are Small economies better placed to respond than big economies?

• Annexures

PE in Digitalized World (1/5)

Various types of digital business

E-tailing

Sale and purchase of goods and services conducted

over computer networks

Online Advertising

• Display of ads• Appear amongst search

results• Free digital content to

view paid ads• Ads on social media

sites

App Stores

Digital distribution platform for software

Free model / Premium model / Freemium model

High frequency trading

Huge volume of trades conducted at high speed

through complex computer algorithms (co-

location

Payment services

Cash payment solutions (settlement agencies)

E-wallets (Bitcoin)Mobile payment solutions

for in-app payments

Cloud Computing

Standardized, on-demand, online computer services


Google Ireland

Google France

French Customer

Administrative and Marketing support

services

Permanent establishment (‘PE’)

Fixed Place

No physical presence only virtual presence

Dependent Agent

No Authority to conclude contract

No PE

Fee

Paris Administrative Tribunal dismissed the French Tax Administration’s argument and held that google doesn’t have PE in France as neither did Google France had fixed place of business in India nor does it have authority to conclude contracts. It merely had authority to find customers.

French Tax Administration held that Google have a dependent agent PE in France as per the Franco-Irish tax treaty

Recent ruling of Paris Administrative Tribunal


PE avoidance in digital economy

• Significant economic (remote) presence (through website or other digital means) without substantial physical presence, impose

major challenge on the current rules which determine nexus with a jurisdiction for tax purpose

• The concern is exacerbated due to unique features of the digital economy. Some of these are

Mobility of intangibles Mobility of users Mobility of business functions

Reliance on data Network EffectsMulti - side business

models


Reduced need combined with artificial avoidance – augments nexus concerns in digital economy

No substantial presence warranted• Only offices undertaking activities like purchase, storage, delivery falling

within preparatory or auxiliary • Is storage and delivery an auxiliary function in the context of e-tailing?

Remote interactions with customers • No need for sales office• Communicating via phone, emailing, fax etc

People replaced by software• Software undertaking automated function – no PE under OECD principles • Eg, high frequency trading

Artificial avoidance • Placing server in low-tax jurisdiction – reduced latency may still be achieved

by caching content locally• Fragmentation of activities to fit within the exception rule


OECD principles on taxable presence in E-commerce

Nature of presence Whether a PE? Remarks

Website No Not a tangible property and does not qualify as a ‘person’

under agency PE

Internet service provider Generally No Since hosting services to a number of enterprises

Computer equipment / server Yes Subject to satisfaction of ‘core function’, ‘fixed location’

and ‘disposal’ test

Mirror server for security and efficiency

purpose

Yes / No Discusses possibility of qualification as ‘preparatory or

auxiliary’

Taxing Digital Economy from policy perspective -India (1/3)

India’s position on OECD commentary

• A website may constitute a PE in certain circumstances

• A foreign enterprise can be considered to have acquired a place of business by virtue of hosting its website on a particular server

at a particular time

Indian jurisprudence on website PE

• Indian companies advertising on non-resident company’s search engines – whether foreign entities have a PE in India? –

Tribunals have held against PE constitution

• Kolkata Tribunal has noted that concept of PE was conceived at a point in time when internet and e-commerce was not even on

the radar and does not really fit into the modern day world in which virtual presence is effective for carrying on business -

Appeal of revenue admitted in High Court

[Right Florist Pvt Ltd - Kolkata Tribunal; Yahoo India Pvt Ltd and Pinstorm Technologies Pvt Ltd – Mumbai Tribunal]

Taxing Digital Economy from policy perspective -India (2/3)

• Observations of Madras HC

• Physical presence of an entity has become insignificant in a virtual world

• Concept of ‘virtual presence’

• Increasing complexity due to technological advancements – use and role of digital information, goods etc – foreign enterprise

may carry on business without physical presence

[Verizon Communications Singapore Pte Ltd – Madras HC]

Jurisprudence on server PE

• Computers installed at customers’ premises amounted to a fixed place PE

[Galileo International Inc – Delhi Tribunal; Amadeus Global Travel Distribution SA – Delhi Tribunal]

Jurisprudence on software PE

• Software owned by non-resident and installed on computers of Indian agent does not constitute a PE for the non-resident as it

merely amounts to grant of right to use software. In the case, software was critical for the agent to serve the non-resident

[Western Union Financial Services – Delhi Tribunals]

Taxing Digital Economy from policy perspective -China (3/3)

Chinese VAT(Destination based taxation, point of

consumption relevant)

Imports and exports of services are subject to VAT Most exports are exempted

or zero-rated

Service provider outside of China - VAT shall be

collected and paid on a withholding basis

Foreign companies not permitted to register for

VAT as of now

Treaties – Inconvenient truth? (1/3)

Most of tax treaties entered into before digital economy came in vogue

Present taxation threshold require physical presence

Difficult to ring fence digital economy

No distinction in taxation principles for digital economy

Core components of business enjoy ‘Preparatory & Auxiliary’ exemption

Possible to artificially avoid permanent establishment status


• DPT aims to tax scheme carried out for obtaining tax benefit and / or reduction in foreign tax liability

• Applicable to income years commencing on or after July 1, 2017 irrespective of transaction date

• Certain exclusions provided ie managed investment trust, foreign collection investment vehicle with wide membership, etc not

covered

Australia’s Diverted Profit Tax (DPT)

India’s Equalisation levy (EL)• EL aims to tax digital / online services provided by non-resident to a resident or PE of a non-resident

• Presently, only online advertising services are covered. However, EL may be levied on following services / facilities in future:• Cloud computing• Website designing and maintenance• Digital space• Digital platforms for sale of goods and services• Online use or download of software and application

• Certain exclusions provided such as no EL is levied if aggregate consideration for services in a FY is upto INR 100,000


Country Nature of levy Measures taken

Argentina Withholding tax • Introduction of turnover tax withholding system for revenues derived by non-residents from rendition of online services (ie from use of internet to obtain access to movies, TV series, games, music and other similar services, when payments are made to non-residents with credit card or debit card)

• Issuers of credit card /debit card entrusted with the obligation of ‘withholding agents’

• Rate - 3 percent of net price to be withheld at the time of remitting funds abroad

Australia GST • Scope - Digital products/services imported by Australian consumers and intermediaries operating ‘electronic distribution platforms’ that act as conduits for digital products provided to Australian consumers

• Triggering point – Turnover within a 12 months period is AUD 75,000 or more

• Rate - 10 percent

Brazil Withholding tax + Indirect tax

• No changes proposed – but formal confirmation on tax treatment on foreign data centers provided

• Payment by Brazilian residents to foreign companies – for provision of data centers subject to following taxes Income tax withheld at source, Contribution to the Economic Domain and Contributions on Imports.

Tax incentives for promotion of high tech (1/3)

Resident State

Usually, income are only taxable in source state due to tax credit available in resident state

Source State

Incentives provided in source state Such as in Indian context, income earned from export of

services (including computer software) is exempt from taxation, subject to certain conditions

Income is not subject to tax in either of the states

Income not taxableIncome not taxable

Action 5 – Countering harmful tax practices effectively

• Current concerns – a) preferential regimes being used for artificial profit shifting and b) lack oftransparency in connection with certain rulings

• FHTP delivered its initial report in 2014, which is incorporated and superseded by the final report

• Main focus of FHTP’s work:

Agreeing and applying methodology to define substantial activity requirement to assess preferentialregimes

Improving transparency through compulsory spontaneous exchange of certain rulings

Substantial activity for preferential regimes (Nexus approach) - allows a taxpayer to benefit from IPregime only to the extent that the R&D cost incurred by such taxpayer itself that gives rise to IP income

Transparency to be improved through compulsory spontaneous exchange on rulings relating topreferential regimes

Tax incentives for promotion of high tech (2/3)

Tax incentives for promotion of high tech – India (3/3)

Patent box regime - India’s step in response to BEPS action plan 5

• In Finance Act 2016, Indian Government introduced regime for taxation of royalty income in respect topatent developed and registered in India

Salient features of Patent box regime

• Beneficial tax rate of 10 percent on gross amount of royalty (in respect of patents) by a person resident inIndia, if following conditions are satisfied:-

The Indian resident should be the true and first inventor of the invention;

Inventor’s name is entered on the patent register as the patentee; and

Includes every person, being the true and first inventor, where more than one person is registered as patentee

Are small economies better placed to respond than big economies?

Small Economies Technologically less advanced

Less number of businesses

dependent on digitization

Easier to adopt / changes in tax

regime

Big EconomiesTechnologically

developed economies

Digitization embedded at the grass root level of

businesses

Any policy change would severely impact business

Contacts

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Mukesh Butani

[email protected]: +91 11 66783010

mailto:[email protected]

digital economy symposium disruption to traditional ...€¦ · 15/08/2017 · online advertising...

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