Double Taxation Hangs On Big Tech Firms

As a part of the Finance Act 2020, the Indian Tax Authority expanded the scope of the Equalisation Levy prevailing in India and it is now referred to as Equalisation Levy 2.0.  The new levy will charge a 2% tax on the gross revenues of a non-resident e-commerce operator from the provision of e-commerce supply or service. The Big Tech firms like Google, Facebook, Amazon, Apple and Twitter are in fear of India’s equalisation levy as they could lead them to double taxation. In countries such as the UK and France, similar digital tax regulations already exist.

Equalisation 2.0 was made effective on April 1, 2020. In Finance Act 2021, to clarify and expand the scope of the Equalisation Levy 2.0, further amendments were made. India implemented Equalisation Levy 1.0 in 2016 and according to the Indian Tax Authority, the institution of the concept of an equalisation levy was a measure to mend the gaps in the fiscal pillars. As per Equalisation Levy 1.0, if the multinational companies generate more than Rs 100,000 gross revenues annually from online advertisements from Indian residents or non-resident companies with a permanent establishment in India, they will be charged 6% of the annual revenue as tax.

According to Equalisation Levy 2.0, along with the 6% tax charged, India charges a 2% equalisation levy on these companies if their advertisement is visible in India. This is irrespective of the fact whether the advertisers or multinationals are based in India or not. Now, the question revolves around where to pay the tax; where the advertiser is located or where the advertisements are visible. India collects taxes on both of these. The Equalisation Levy 2.0 may be applied if a non-resident company who does not have a physical presence in India sells their goods or services to Indian residents through an electronic platform. A few transactions like royalty or a fee for technical services are specifically exempted from this levy. 

This double tax agreement is hanging like a sword over the Big Tech firms.

To tax digital giants, countries like the UK and France have implemented unilateral measures which are not recognised by other countries. It may not comply with the international tax framework. India is the forerunner of such measures as it implemented the Equalisation Levy 1.0 in 2016. Due to these regulations, the Big Tech firms like Google, Facebook, Amazon, Apple and Twitter might have to pay taxes for their advertising and content revenue in different locations. There are chances for these companies to get taxed in two or even three countries.

In the UK, DST or Digital Service Tax is levied from business users or advertisers and is similar to the Equalisation Levy in India. These equalisation levies and Digital Service Taxes are non-creditable in the home country. So on the same transaction, the Big Tech firms could see multi-layer taxation including payer-linked, access-linked and based on fiscal domicile at the gross revenue level. This double taxation or multi-layer taxation can increase the cost significantly for such tech companies.

In India, a non-resident company that owns and operates a digital facility for the online sale of goods or services is termed as an e-commerce operator. All companies that run any digital platform to sell goods or services are included in it. Each financial year, an e-commerce operator with an annual gross revenue of 2 crore Indian rupees is obliged to pay Equalisation Levy 2.0. Due to the lower threshold level of revenue, this levy will impact even small and medium-sized companies. In France and the UK, this threshold level is comparatively higher. France applied the digital service taxes on the business giants who generate digital advertising and sell user data and have a gross annual income of more than 25 million euros. In the same case, the gross revenue threshold is more than 25 million pounds in the UK.

These digital service taxes or equalisation levies are outside the spectrum of international taxation. Hence, they cannot be exempted from other domestic tax obligations or these companies will not get a credit for such taxes in their countries of business. Some equalisation levies are eligible for foreign tax credits but the Indian equalisation levy does not come under any of the tax treaties. Therefore is not eligible for credit against home country taxes. Countries like Singapore have agreed to consider Indian equalisation levy as a tax deductible expense but they haven’t permitted the companies to avail credit for it.

The equalisation levy has turned out to be an extra burden on the companies. They will have to pay tax in their home country on their entire profit. This includes the revenues on which tax has already been paid in India and this process of paying taxes in two or more countries leads to double taxation. Take this example, a company headquartered in the UK decides to advertise on Facebook. If the content is visible in India too, the company has to pay a 2% equalisation levy in India for the transaction. Similarly, they have to pay DST applied on the advertising in the UK. And this will not be enough as the company may have to pay the corporate taxes in the country where it is located along with this.

Some of these Big Tech firms are putting their domestic bots into action to block certain global advertising content. Many of the large digital platforms have already done this to avoid certain country-specific sensitive content. So this can be easily done but the chances of additional complications are prevalent. Many companies like Google have already started passing on the weight of the digital taxes to customers whose advertisements are visible in the country. This step may pressure other digital multinationals to follow what Google did.

The Indian government has made the issues posed by the digitalised economy a reality for many companies. For better tax management, it is essential for the companies to include these equalisation levies as part of their global tax planning. It has now become vital to assess the implications of the Equalisation Levy 2.0, especially with the tax optimisation opportunities.