scorecardApple, Google, and Facebook can escape higher taxes in India by setting up local firms
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Apple, Google, and Facebook can escape higher taxes in India by setting up local firms

Apple, Google, and Facebook can escape higher taxes in India by setting up local firms
PolicyPolicy2 min read

  • The Organisation for Economic Cooperation and Development (OECD) has pitched its proposal for a new tax that will tax multinational companies according to where they have the most users.
  • This means that MNCs, including digital companies, will now have to pay tax in countries where they are earning profits regardless of having a physical presence.
  • In India, companies will have the choice to operate as a foreign entity or set up a subsidiary locally to come under the lesser domestic tax bracket.
India is a vast market for tech giants like Google, Facebook and Apple. They provide numerous goods and services in the country.

But since they are able to provide services without physical presence, they do not fall under the tax net. Indian government has long since been trying to fix it by making new tax rules to catch them.

Now, it might find a friend in Organisation for Economic Cooperation and Development (OECD). The organization has pitched its own proposal to expand the rights of governments to tax multinationals (MNCs), including digital companies.

"This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all MNEs pay their fair share," said OECD Secretary General Angel Gurría in a statement.

India is not a member of the OECD but has a working relationship with the organisation. The cooperation between the two dates back to 1995.

As per the existing laws, a foreign company which is not registered in a country, cannot be taxed.

As per the OECD's proposal,irrespective of whether a company is registered or not, if it’s ‘earning’ in India, it can be taxed by the Indian government.

The choice between two taxes

If such a tax is implemented, digital companies will no longer be able to get a ‘free pass’. The tax rate has not been decided yet but the existing tax structure gives MNCs the choice between paying 42% to 22% tax on income.

"There are two rates, one is for domestic companies and the other is for foreign companies," ICAI President Ved Jain told Business Insider.

Foreign companies — that are not incorporated in India and only have a branch office in the country — will be taxed at 42%. It means the tax department will take local employees, sales, consumers and all other factors associated with a non-digital company into account, for digital companies.

Domestic companies, on the other hand, are taxed at 22%.

If foreign companies want to pay the same tax rate at domestic companies, they have to setup local subsidiaries.

"So, the moment you have a company in India, you become a domestic company — a subsidiary normally," said Jain.

The new tax rules will mean that tax payments won’t only be applicable where a company chooses to establish its headquarters. It will now be distributed according to areas where a company has more users.

This could mean a lot more revenue for the Indian government where a large chunk of Google, Facebook and Amazon’s users reside.

See also:
India wants Google's help with its $1 trillion digital economy, the weather and its villages

India decides to opt-out of WTO e-commerce talks over digital tax concerns: Report