The OECD’s proposal for taxing multinational enterprises (MNEs), including digital companies, based on consumer-facing activities or markets instead of their physical presence, would benefit countries like India in terms of revenue, say experts.
The OECD Secretariat has published a public consultation paper to advance international negotiations to ensure large and highly profitable MNEs pay tax wherever they have significant consumer-facing activities and generate their profits.
The proposal is aimed at re-allocating some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets.
The Organisation for Economic Co-operation and Development (OECD) said the proposal envisages that MNEs conducting significant business in places where they do not have a physical presence be taxed in such jurisdictions through the creation of new unified rules.
Amit Maheshwari, Partner Ashok Maheshwary & Associates LLP said the proposals in the consultation paper create a new nexus rule (largely dependent on sales) that would not depend on physical presence in the user/market jurisdiction.
Though this is only a consultation document by the OECD Secretariat and does not give out any recommendations as such right now, the approach gives guidance where this complex issue is headed, he said.
“India’s draft report on profit attribution gives weightage to sales and users as a factor for profit attribution and this paper is a shot in the arm to the India and vindicates their position,” he added.
Maheshwari further said that once these proposals are finalised, it would result in higher revenues for countries like India having a large user base but a very low share in the value chain.
Commenting on the paper, Rohinton Sidhwa, Partner, Deloitte India said the impact of this would be a vastly increased tax base for countries like India.
“Most importantly the scope of the new proposal extends now from just digital business to all consumer facing business.
“This is a very significant expansion and seems to be an acknowledgement of what India has asserted all along, that the market is an important component and deserves to be a factor for profit allocation,” he said.
S Vasudevan, Partner, Lakshmikumaran & Sridharan, said, “As expected market jurisdictions like India have already welcomed the proposal and are likely to push for a larger consensus. It will be interesting to see how US reacts to these proposals, as many of its businesses would be impacted.”
“At present, the document merely outlines the broad framework and many of the details are yet to be filled in. There is no doubt that a paradigm shift is proposed in the basic concepts of international taxation. Whether it will be for better or worse, only time will tell,” he added.
Frank D’Souza, Partner and Leader Corporate and International Tax, PwC opined that the OECD proposals provide an alternate to the existing attribution principles for taxing rights in relation to cross border digital businesses.
It seeks to alleviate the concerns of countries where customers for digital businesses are based, but are unable to exert taxing rights, he added.
Rajendra Nayak, Partner, International Tax and Transaction Services, EY India, said the approach seeks to allocate a new taxing right to market jurisdiction through new nexus and profit allocation rules.
The arm’s length principle would be complimented by formula based solutions, he said, adding that it will have far reaching impact on multinational enterprises, whether or not they are heavily involved in digital business and may have an impact on traditional models as well.
The Paris-based OECD said the proposal brings together common elements of three competing proposals from member countries, and is based on the work of the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting), which groups 134 countries and jurisdictions on an equal footing for multilateral negotiation of international tax rules.
