CBDT panel recommends 10% withholding tax on e-commerce deals
22 March 2016
A panel appointed by the Central Board of Direct Taxes (CBDT) has recommended a `withholding tax' on commercial transactions on digital platforms such as Google, Yahoo or Amazon. The committee has proposed a globally standardised 10 per cent final withholding tax on all base-eroding business payments to registered non-residents.
The withholding tax would only be an ''equalisation levy'' and not a tax on income, and hence international treaties among countries will not apply to such levies.
The committee has sought to address the key issues of base erosion and profit sharing based on OECD studies, including under-taxation of so-called stateless income and an unacceptable division of tax revenues (collected from the digital economy) that leaves source jurisdictions wanting.
The committee has proposed a globally standard 10 per cent final withholding tax on all base-eroding business payments to registered non-residents, with specific, again globally standard, exemptions to payees registered to be taxed under a net taxation scheme.
Such net taxation scheme may be a nexus-based solution or an elective scheme to avoid the withholding tax proposed here. This proposal depends on a reliable, globally standard, quick, cheap and automatically shared registration system shared by at least the major economies, such as the BEPS countries.
Other exemptions may also be standardised for payments subject to in-place withholding schemes (eg, employment), to non-base-eroding payments (eg, dividends) and to non-digital goods and services (eg, material, rents and services performed by humans on the ground).
Payments to unregistered payees will be subject to a higher 15 per cent withholding tax. These would include payments to accounts in or owned by low- or no-tax jurisdictions (say, a 15 per cent general corporate tax threshold). This tax may be non-final and partially refundable upon filing.
B2C transactions should initially be exempt as non-base eroding. Yet, if countries are already concerned with the revenue division implications of such a decision, a complimentary final withholding tax of 15 per cent could be collected on all payments cleared by financial institutions, unless the payees register to be taxed under any net taxation scheme.
Strict regulation and international cooperation are crucial for this solution to Work, the committee pointed out.
For C2C transactions, the committee said, the withholding tax scheme is not perfect. However, in the case that countries cannot reach agreement on a nexus-based scheme it permits a simple, if crude, response to the challenges of the digital economy. As such, it requires monitoring and perhaps tweaking over time. Therefore, the scheme should be accompanied by a review mechanism.
The proposed solution does not directly employ a definition of the digital economy, on which it is notoriously difficult to achieve a consensus. Nevertheless, if countries insist on basing a withholding tax on a legal definition, this paper offers to follow a functional definition that, similarly to the whole withholding tax solution, although not perfect, could cover most of the bases at this time. We view this option as the least desirable of the solutions mentioned in this paper.
Lastly, the proposal raises several potential interactions with related BEPS matters. Most directly, the VAT response to the challenges of the digital economy may well correspond to our proposal, especially in the need for a coordinated, standard registration-based response.
The committee has recommended development of a statistical apparatus to measure the activity of internet platforms as any specific tax on internet activity requires a precise measure of the activity of internet platforms.
To measure this activity, tax and regulatory authorities must have access to data on users, numbers of clicks, advertisers. It is thus extremely important to construct a statistical apparatus to measure the activity of internet platforms, the committee pointed out.
Also, it is necessary to determine a sharing rule for corporate profits reflecting the number of users in the jurisdiction of the tax authority
Current rules for the corporate taxation of multinationals are based on transfer pricing and territorial definitions which are obsolete. In the context of international negotiations, new rules must be put in place to adapt definitions to the digital economy.
These sharing rules should reflect the number of users in the jurisdiction of a tax authority, as the presence of these users is a necessary condition for the platform to make profits.
Taxes based on profits are not distortive and enable tax authorities to capture some of the network rent generated by network externalities.
In the absence of a fair sharing rule on corporate profits, the tax authorituies should consider using a specific tax based on revenues (sales or advertising) generated in the jurisdiction of the tax authority, the committee said
In the interim, the national tax authority may implement an ad valorem taxation based on the profits generated in the jurisdiction, given that variable costs are negligible, profits can be identified with revenues.
Sales revenues can easily be observed; revenues generated by advertising are more difficult to assess if contracts between advertisers and platforms are located outside the country.
Specific rules can be put in place to assess advertising revenues based on statistical information on the activity of internet platforms in the country.
An eight-member CBDT-appointed committee, which included representatives of industry biggies such as Flipkart and Amazon, had in early February suggested that an ''equalisation levy'' of 6 per cent be imposed on 13 specified digital transactions.
However, Budget 2016-17 had proposed the 6 per cent ''equalisation levy'' only on ''online advertising'' payments to non-resident recipients. Following this move, there was some speculation on the nature of this levy, as the government had introduced a separate chapter in the Finance Bill for the purpose of e-commerce taxation.
The exponential expansion of the digital economy in India in recent years has created new tax challenges. To address these challenges, the Centre has opted for an ''equalisation levy'', although it could have gone ahead with one of the BEPS project recommendation of imposing a final withholding tax on digital goods and services provided by foreign e-commerce providers.