BEPS Skirted Taxing The Digital Economy, Says CBDT’s Akhilesh Ranjan
If the belief was that Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project was the end of reform in international taxation, we were sadly mistaken, Akhilesh Ranjan, member, Central Board of Direct Taxes, remarked at the International Fiscal Association’s tax conference last week. While BEPS opened the door for reforms in international taxation, it might have served to plug only a few loopholes, Ranjan said.
Here are the key remarks that Ranjan made:
Taxing The Digital Economy
- The debate around digitalisation of economies has moved from how to tax digital services to allocation of taxing rights. It’s a much broader discussion which is necessitated by the problems and challenges posed by the digital economy.
This was one of the fundamental issues of international tax which BEPS had skirted and had not really addressed.Akhilesh Ranjan, Member, CBDT
- Along with the proposals which are under discussion on taxing the digital economy, there is one on minimum tax. One shouldn't ignore the importance of it. India may or may not be heavily involved in that discussion because we are devoting more attention to allocation of taxing rights, but that discussion is also going to the root of the problem. It would have, as a final objective, a sort of standardisation of tax structures across the world.
Disparity In Tax Structures
- The second issue which BEPS did not talk about was the disparity in tax structures in different countries—the so-called low tax jurisdictions. One couldn’t address that because it’s a sovereign function—each country decides tax rates and tax structures. It’s giving rise to issues which are making the reforms not so effective, when it came down to actual field operations.
If standardisation of tax structures happens, then many problems of the world would get resolved. I don’t know if it can happen right now or it will take years to come together. But it is a step in the right direction. Measures have to be taken to persuade economies and jurisdictions to follow some sort of international standards in their tax structures.Akhilesh Ranjan, Member, CBDT
Digital Taxation And Profit Attribution: India’s Stance
- India has taken a very sober and considered approach on these issues. India made it clear right from the beginning that the challenges thrown by the digital economy need fundamental changes in tax rules. In the absence of consensus, India made it clear that it would take unilateral measures like Equalisation Levy.
After we did it, dozens of countries followed us. The EU brought out a paper, France has also approved something like that. Every country is jumping on to the bandwagon.Akhilesh Ranjan, Member, CBDT
- India introduced Equalisation Levy as an interim measure because the administration realised that this is not the best way of taxation. India would like to see a consensus on actual corporate net profit taxation but that needs drastic changes in the rules and a fundamental shift from the concept of fixed place of business.
- The thinking of the last 70 years is that profits are taxable only on the basis of a fixed place of business, and in the last 8-9 years that profit should be attributed on pure transfer pricing principles. These are concepts that we don’t think can work in the modern world.
When they talk about marketing intangibles, the U.S. does talk about residual profit split but that is not the traditional arm’s length approach to profit split. It cannot be. Normal transfer pricing based on functions, assets, risk cannot and will not work in this scenario. We have to look beyond it.Akhilesh Ranjan, Member, CBDT
- Hence, India made another intervention. India made it clear that we're not only talking about a change in the rule of nexus, we aren't only talking about significant economic presence in addition to a fixed place of business, but we're also talking about a different way of apportioning or allocating income.
- It may not be a formulary apportionment. That has its own problems of how to get profit in different jurisdictions, how to combine that and then allocate it. And so, we have proposed a fractional apportionment which is different from a formulary apportionment. It stresses mainly on sales, and the revenue derived from a jurisdiction as an indicator of the amount of profit that should be allocated.
When we first moved this proposal there was no serious attempt to look at it. But the more we discussed and put forward our views and showed that your values, sales and profits are coming from the market to a greater extent, countries have had to look at it. And now, major nations of the world are in agreement that the contribution of market has to be kept in mind in allocating income.Akhilesh Ranjan, Member, CBDT