MUMBAI, June 10 (Reuters Breakingviews) - India, like many countries, wants to tax technology giants based on local revenue or domestic user numbers. Recent rich-world proposals may disappoint. The country of 1.3 billion people is best placed to lead a fightback.
The Group of Seven major industrial nations – Britain, Canada, France, Germany, Italy, Japan and the United States – agreed last week on a 15% minimum corporate levy and new taxing right based on where companies like Alphabet’s (GOOGL.O) Google generate revenue, rather than where they declare profit. India and other big emerging economies get their say at July’s Group of 20 meeting.
The deal may look stingy to New Delhi, which already imposes a levy on digital giants. That tax is based on sales and set at 2% on e-commerce goods and services revenue above 20 million rupees, or about $270,000. By comparison, KPMG reckons about $900 million is the bottom of the range of what could be suggested when the G7’s proposal is fleshed out. And while India’s rules allow it to go after a dizzying number of multinationals, the rich-country plan could cover as few as 100, according to press reports, and exclude multiple sectors.
In particular, the G7 proposals largely sidestep a debate over who has the right to tax digital behemoths, like Facebook (FB.O) and Amazon.com (AMZN.O). These mainly American giants generate local revenue with minimal physical presence and hence pay relatively little tax locally. But the proposed new taxing right changes little. An Organisation for Economic Co-operation and Development analysis last year found that a plan similar to the G7’s would raise a meagre $5 billion-$12 billion worldwide.
One solution might be to tax companies based on revenue or customers, which would suit India, where Facebook has over 400 million users, as well as others like Argentina and Brazil. It would also be closer to what some rich nations, including Britain and France, have advocated. These countries accepted the digital-tax fudge, perhaps because they gain from the broader package. The Tax Justice Network reckons 60% of revenue from a similar OECD plan would go to G7 nations, which are home to more multinationals. Even if that estimate is high, the OECD also found that high-income countries benefit more than middle-income ones from a minimum global rate.
India and other big emerging economies might sign up to the G7 plan in the spirit of global cooperation. But short-changed governments have a strong incentive to continuously push for exemptions and to find creative ways to get their dues. The size of its population and its relative openness to foreign companies, puts India in pole position to lead any resistance.
- The Group of Seven major industrial countries have found a way to include Amazon.com on a list of 100 companies that are set to face higher taxes in the countries where they do business by targeting its more profitable cloud computing unit, Reuters reported on June 8 citing officials close to the talks.
- The G7 agreed on June 5 to commit to a minimum 15% global tax rate that would reduce the incentive for multinational companies to shift profits to tax havens.
- The group also agreed to force multinationals to pay taxes where they operate regardless of whether they have physical presence, awarding so-called market countries taxing rights on “at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises”.
- European countries will scrap existing digital services taxes as the new global rules go into effect, U.S. Treasury Secretary Janet Yellen said, noting she expected Amazon and Facebook would be covered under the new deal “by almost any definition”.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.