IMF SARTTAC conducts symposium to deliberate over measures to tax the digital economy

The South Asia Regional Training and Technical Assistance Center (SARTTAC) of the International Monetary Fund (IMF) conducted a symposium on February 3 and 4, 2020, to deliberate over current developments in international corporate taxation policy, legislation and Administration. Key focus of the symposium was to discuss the Unified Approach and GLoBE proposals of OECD and how they will affect developing countries. The symposium was attended by experts from IMF and India and officers from Bangladesh, Bhutan, India, Nepal, and Sri Lanka.

The participants discussed the shortcomings of the present transfer pricing system, gaps in transfer pricing analysis, and how Formula Apportionment (FA) could be a solution. Various nuances in implementation of FA were also discussed. Dr. Suranjali Tandon of the National Institute of Public Finance and Policy (NIPFP) remarked that digitalised businesses cannot be taxed under the current transfer pricing regime, but this system has evolved organically over decades. Precautions should be taken when implementing a new system. Ruud De Mooij, Division Chief of Fiscal Affairs Division at IMF, stated that there were proposals to ring-fence digitalised companies and bring about a new tax system only for them. However, existing companies are getting digitalised and adopting new models that may escape territorial nexus. Hence, a new principle-based taxation regime needs to be developed for all companies.

Referring to his research on FA, Ruud stated that formulary apportionment will benefit developing countries when employment or sales are taken as allocation keys. However, he cautioned about various assumptions that his research had relied upon. Sobhan Kar, Director – APA, detailed the Significant Economic Presence (SEP) concept and how this concept had brought fractional apportionment into Indian tax code. While formula apportionment is a top-down apportionment, fractional apportionment is a bottom-up apportionment by various countries.

Ruud stated that formulary apportionment will benefit developing countries when employment or sales are taken as allocation keys. However, he cautioned about various assumptions that his research had relied upon.

Rasmi Ranjan Das, Joint Secy, FTTR-1, gave an impassioned speech about how transfer pricing has lost its relevance. Referring to CbCR data, he said that transfer pricing fails to allocate to developing countries: (a) any returns from business run by digital companies remotely, (b) any return from the residual profits that are attributable to demand-side factors such as customer choice, infrastructural factors, marketing intangibles etc. He also expressed his reservations on the Unified Approach (UA) being proposed by OECD. He narrated his experience in the Inclusive Framework (IF), and how UA is a step in the right direction only if implemented properly. He said that all developing countries should closely read the UA proposals and conduct Economic Impact Assessments (EIA) in their country to find out what factors affect the profit that would be apportioned to their respective treasuries.

He flagged some concerns that developing countries should be cautious of:

·        Extent of share of residual profit of group profits of a MNC that would be apportioned under UA

·        Regional segmentation of what is routine and what is residual profit

·        Impact of UA on withholding tax on royalty and fee for technical services

·        UA should not have any impact on existing dispute resolution mechanism of sovereign countries

·        Economic Impact Assessment using appropriate data needs to be done

On the issue of minimum taxation being proposed under the Global Anti-Base Erosion (GLoBE) proposals, Ranjith Hapuarachchi, Deputy Commissioner General in Inland Revenue Department of Sri Lanka, raised apprehensions about it. He argued that Sri Lanka attracts investments by giving tax incentives. It does not want to impose a minimum tax rate that would drive away business. Chetan Rao of FTTR stated that tax incentives are given by various countries to attract investment. Investors go to the country that gives best tax incentives. As a result, countries compete with each other to give tax incentives. It is a race to the bottom to give incentives, in which all countries lose. The very purpose of minimum tax rate is to prevent such race to the bottom.

Issues in taxation under VAT and GST regimes were also discussed. Sri Amitabh Kumar, Joint Secy in GST Council, explained how foreign digital companies have to take REG 10 registration from Principal Commissioner of CGST of North Bangalore. He said that e-commerce companies have special obligations under GST laws. He also explained how taxation of OIDAR services effectively counters the scope in B2C transactions in digital economy.

In the panel discussion at the end of the symposium, Prof Rathin Roy expressed grave concerns about UA and whether it can be implemented. Drawing inspiration from theories of political economy, he said that ‘cooperative coercion’ on tax matters is difficult. As illustration, he mentioned how EU could unify the monetary policies of all member countries but could not unify the fiscal policies of member nations.

Rasmi Ranjan Das countered this argument by saying that last decade has seen a ‘death of accounting’. FAR Analysis has failed because assets are not appropriately shown under present accounting standards. Intangible assets that have low book value actually have high value. Similarly, profit allocation has failed. We cannot tax digital economy. Thus transfer pricing has reached its limits.

Das said that the world is exploring UA because if a principle-based system does not come, all countries will implement their unilateral measures, which will in turn lead to double taxation.

Prof Roy said that Base Erosion and Profit Shifting (BEPS) leads to revenue loss, but it also leads to welfare gains. Although it is not the job of taxmen to measure welfare gains, it is also a factor that the country has to look into. Das disagreed with the argument by saying that when foreign companies resort to BEPS, they pay lower tax than domestic companies. As a result, they have higher capital at their disposal than domestic companies. It is a competitive advantage that destroys domestic business in India. Thus, anti-BEPS measures are economic defence measures for India. Michael Keen concurred that differential rates should not be available with domestic business and foreign business.

Views are personal