Action Plan 1 – Challenges of Taxation in Digital Economy - International Taxation - Income Tax

Action Plan 1 Challenges of Taxation in Digital Economy The broader tax challenges raised by digitalization. The 2015 Action 1 Report identified a number of broader tax challenges raised by digitalisation which it identified as nexus, data and characterisation , and that relate to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among countries. While some options to address these concerns were discussed, no consensus emerged and decision was made to continue working in this area. This continued work led to the delivery of an Interim Report in March 2018 analysing the impact of digitalisation on business models and the relevance of this for the international income tax system. Members of the Inclusive Framework did not converge, however, on the conclusions to be drawn from this analysis and committed instead to continue working together to deliver a final report in 2020 aimed at providing a consensus-based long-term solution. Consistent with that mandate, recent work of the Inclusive Framework has focused on the examination of a number of proposals that seek to revise contemporaneously the existing profit allocation and nexus rules, with a view to allocate more taxing rights to the country where the customers and/or users are located (so-called market country ). The implications of these proposed solutions reach into fundamental aspects of the current international tax architecture, as they entail modifications potentially going beyond the arm s length principle and no longer constrained by physical presence requirements. OECD Recommendations under Action Plan 1 of the BEPS project. Modifying the existing Permanent establishment (PE) rule to provide whether an enterprise engaged in fully de-materialized digital activities would constitute a PE, if it maintained a significant digital presence in another counrty s economy. A virtual fixed place of business PE in the concept of PE i.e., creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website. Imposition of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of equalization levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having PE in other contracting state. Consensus based solution for tax challenges arising out of digitalisation As of October 2021, over 135 countries and jurisdictions have joined the Two-Pillar Solution to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. Pillar One Re-allocation of taxing rights Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms there have a physical presence there. Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Pillar Two Global anti-base erosion mechanism Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases. The global minimum corporate income tax under Pillar Two - with a minimum rate of 15% - is estimated to generate around USD 150 billion in additional global tax revenues annually. Additional benefits will also arise from the stabilization of the international tax system and the increased tax certainty for taxpayers and tax administrations. See Global Anti-Base Erosion Model Rules published on 20 December 2021, which delineate the scope and set out the operative provisions and definitions of the GloBE Rules. These rules are intended to be implemented as part of a common approach and to be brought into domestic legislation as from 2022. Change the allocation of taxing rights through a coherent and concurrent review of the profit allocation and nexus rules (Pillar One) Action taken by India in its Tax Regime To address the challenges of tax of the digital economy, India in Finance Act, 2016 introduces the Equalisation Levy by insertion of chapter VII of Finance Act, 2016 to impose Equalisation levy on the specified services such as Online advertisement Any provision for digital advertising space or any other facility or service for the purpose of online advertisement However, the consideration received or receivable for specified services and for e-commerce supply or services would not include the consideration, which are taxable as royalty or fees for technical services IN India under the Income Tax Act, 41961 read with the DTAA notified by the CG under section 90 or section 90A. Further, the concept of Significant Economic Presence (SEP) which is similar to the virtual fixed place PE as recommended in the 2015 BEPS Action Plan 1 report is being introduced vide Explanation 2A to section 9(1)(i), effective from AY 2022-23.