Debate on Digital Tax
Today we bring you the most debated and controversial topic on the international platform, Digital Tax. Taxation by law is most debated in the context of international companies and services. Most of the countries feel that they are losing the tax revenues and other countries won’t agree to international laws because they will be at the losing end of tax revenues.
We clear all the debated topics about this Digital tax. Let’s make it clear what is digital tax. Now consider a manufacturing company in India. The company is producing products and it will pay taxes to the government on the profit of those products. And if these products are sent to other countries, it needs to pay import and export duties if present any in the concerned countries.
But consider a company, for example, providing some online service, which has nothing to do which any physical product. The company can provide you with service from its head office in some other country. Now you present in some country will be provided service by a company which is located in some other country. So which government should get the tax that is to be paid by the company. Which countries tax laws are applicable to these online service companies. The tax that is applied to these companies is called Digital Tax.
Now, this topic of digital tax is of most interest in the international forum. But why the topic is most debated. Just consider the companies office is located in a country A and is providing services to the people in the country B. Now if both these countries tax on the company, then the company has to pay tax to the government of Country A as the office is located in Country A, and also has to pay tax in country B because the service is being provided in-country B. This has lead to double taxation. Paying dual taxes for the same service.
This situation of dual taxation has to be avoided. And hence countries globally are constantly discussing to come to a conclusion on a framework to tax the companies. Now to prevent this double tax on the companies a consensus between the countries is required.
When when we are talking about global policies, each country has different domestic policies and laws that need to be on priority. Every country when coming to a consensus on the global policies will agree only if the country is on the benefitting end. But when it comes to a consensus on digital tax, there are both sides. Some countries are on the losing end and some countries are on the benefiting end. This is causing the debate to prolong on reaching a consensus.
Take India for your understanding. Most of the online service companies are headquartered in the United States and providing services in India. India is on the belief that it losing tax on these companies providing service in India as there is no fixed framework to tax these company services. Now if both countries have to come to a consensus, then India will get tax on the services provided in India by these companies from the US. But the US will lose the tax revenue because now the services are already paid in India. So the US doesn’t want to lose and India wants to come to a consensus. And the debate to bring all countries to a consensus on a single framework is never-ending.
If you look at Organization for Economic Cooperation and Development, OCED, It is trying for a long time to bring countries to a consensus on Digital Tax issue. But there is no clear path that has been laid till now as different countries have different local policy frameworks.
OECD is an intergovernmental organization work to promote intergovernmental economic cooperation and promote growth among the nations. It has first brought up the issue of Digital tax in 2015 when it had tried to bring countries to a consensus and proposed the framework of Profit sharing. Basically the result is that it has come up with Base Erosion and Profit Shifting Action plan (BEPS) Report. But this report is not accepted by many companies as many believed that this will make the economy suffer. hence no complete consensus has been reached on a global platform.
The result is the different countries unilaterally tried to tax the digital services. This had made different countries to pass different domestic laws to tax the Digital services companies and gain on tax revenues.
Now during this time, the debate is continuously going on to come to a single global framework and get consensus from all participant countries and at the same time different nations are creating domestic laws. This had made the international community to speed up progress on the framework and come to a consensus. And bring up a globally acceptable framework to tax the digital economy.
In January 2020, different countries have announced that they are ready to fix the differences and come to a consensus on the framework and has planned to bring the difference by the end of 2020 and come up with a framework for the digital economy.
But recently due to the effect of coronavirus on the domestic manufacturing and other industries, the debate on Digital economy has risen again. Now when you think about the digital economy, there are companies with very high valuation and the tax revenues on these are not to be kept aside by the government. Now even during the pandemic, the digital economy has not seen any effect. The online transaction kept going on and the digital economy has seen its rise during this time. This comes to a difficult situation, whether nations in this situation are ready to come to a consensus with other nations and make a global framework for the digital economy. the answer is doubtful.
If you see the digital economy, it is a Billion to the trillion-dollar economy. Over the last decade, these companies have seen very huge valuation. And in a crisis of corona also the companies are seeing increasing revenues as all started to move online and use online service due to lockdown. So, when the revenues from local domestic manufacturing other sources reduce, the government started to aim at these digital economies and gain tax revenues from these. But at the same, the Country where the Company is headquartered is not ready in this situation to lose the tax revenue. So, what about the fact that countries have announced to come to a consensus by End of 2020. Will countries still stand by the word and come to a consensus to create a global framework for the digital economy. The answer is doubtful.
The present pandemic is also seen as a boon to the already achievement results on the debate of digital tax. Only the next discussion will tell about the result of the framework. But till then it is the digital companies that will be affected. because different countries already passing different laws to tax the services in their countries. This makes the company pay taxes both in the country where services are used and also in the country where the company is headquartered.
Until then see you in next article.