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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

 
Home Articles Taxation         Share :

Annexures

 

 

VIII. Equalisation Levy - Annexures
 

By
 

CA Rashmin Chandulal Sanghvi
 

Annexure 1 – OECD statements on E-Commerce
 

This annexure shows OECD’s statements on E-Commerce at different times.
 

OECD 2005 report:
 

As regards the various alternatives for fundamental changes that are discussed in section 4-B above, the TAG concluded that it would not be appropriate to embark on such changes at this time. Indeed, at this stage, e-commerce and other business models resulting from new communication technologies would not, by themselves, justify a dramatic departure from the current rules. Contrary to early predictions, there does not seem to be actual evidence that the communications efficiencies of the internet have caused any significant decrease to the tax revenues of capital importing countries.
 

Source - http://www.oecd.org/ctp/treaties/35869032.pdf - page no. 72
 

OECD 2013 Report:
 

The spread of the digital economy also poses challenges for International taxation:
 

The digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs. This raises fundamental questions as to how enterprises in the digital economy add value and make their profits, and how the digital economy relates to the concepts of source and residence or the characterisation of income for tax purposes. At the same time, the fact that new ways of doing business may result in a relocation of core business functions and, consequently, a different distribution of taxing rights which may lead to low taxation is not per se an indicator of defects in the existing system. It is important to examine closely how enterprises of the digital economy add value and make their profits in order to determine whether and to what extent it may be necessary to adapt the current rules in order to take into account the specific features of that industry and to prevent BEPS.
 

ACTION 1
 

Address the tax challenges of the digital economy
 

Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules , the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.
 

Source: https://www.oecd.org/ctp/BEPSActionPlan.pdf
 

OECD 2015 Report:
 

Tackling BEPS in the digital economy:
 

Introduction:
 

Many of the key features of the digital economy, particularly those related to mobility, generate BEPS concerns in relation to both direct and indirect taxes. For example, the importance of intangibles in the context of the digital economy, combined with the mobility of intangibles for tax purposes under existing tax rules, generates substantial BEPS opportunities in the area of direct taxes. The mobility of users creates substantial challenges and risks in the context of the imposition of value added tax (VAT). The ability to centralise infrastructure at a distance from a market jurisdiction and conduct substantial sales into that market from a remote location, combined with increasing ability to conduct substantial activity with minimal use of personnel, generates potential opportunities to achieve BEPS by fragmenting physical operations to avoid taxation.
 

Work on the actions of the BEPS Action Plan (OECD, 2013) has taken into account these key features in order to ensure that the proposed solutions fully address BEPS in the digital economy. The following sections describe how the outputs of the BEPS Project, as well as the work on consumption taxes, are expected to address these BEPS concerns once implemented.
 

Annexure II – News item: Google offices raided in Paris
 

Observation: Internationally Governments are getting aggressive against tax avoidance.
 

Tuesday 24 May 2016
 

French investigators have raided Google’s Paris headquarters, saying the company is now under investigation for aggravated financial fraud and organised money laundering.
 

In a major escalation of France’s long-running enquiry into Google’s tax affairs, magistrates revealed on Tuesday that the software giant is suspected of evading taxes by failing to declare the full extent of its activities in the country.
 

Prosecutors said they want to establish whether the Irish company through which Google funnels the majority of its European revenues does in fact control a “permanent establishment” in France.
 

Google maintains that its large offices in Paris, London and other European capitals are not fully fledged businesses, but operate as mere satellites of its international headquarters in Dublin, providing back-office services such as marketing.
 

The company routes most of its non-US revenue from activities such as advertising through Dublin, where the 12.5% corporation tax rate is low by European standards. The structure allows the company to avoid both European and US taxes on the income. (Rashmin: even in Ireland, Google pays less than 0.1% tax. Ireland is a tax haven & facilitates tax avoidance.)
 

Google released a statement saying: “We comply with French law and are cooperating fully with the authorities to answer their questions.”
 

Investigators arrived at the tech firm’s offices in central Paris at 5am local time, with reports of around 100 investigators and five magistrates involved.
 

The state financial prosecutor (PNF) said in a statement: “These searches form part of a preliminary enquiry opened on 16 June 2015 relating to acts of aggravated financial fraud and organised laundering of aggravated financial fraud, following a complaint from the French tax authorities.”
 

The PNF confirmed it had led the operation, assisted by the central office for the fight against corruption and financial and tax crimes (OCLCIFF) alongside 25 computing experts.
 

“The enquiry is focused on verifying whether the company Google Ireland Ltd controls a permanent establishment in France and if, by not declaring a part of the activities conducted on French territory, it has failed in its fiscal obligations, notably regarding taxes on companies and value-added tax.”
 

France, Britain and other countries have long complained about the way Google, Apple, Yahoo! and other technology companies generate profits in their countries but funnel these offshore.
 

In February, it emerged that France was seeking €1.6 bn in back-taxes from Google, which has been criticised for its use of aggressive tax optimisation techniques.
 

In January, Google agreed to pay £130m in back-taxes to the UK Treasury, but the announcement triggered uproar from tax campaigners and opposition MPs, because it meant that HM Revenue and Customs had effectively allowed the firm to continue routing its UK sales through Ireland.
 

The French tax office, in seeking back-taxes from Google, has pointedly refused to strike a deal with the US internet giant as the UK did. Earlier this year, the finance minister, Michel Sapin, said: “The French tax authorities do not negotiate on the amount of tax.”
 

Google has insisted it conforms to tax law in every country in which it operates.
 

The company, according to recent reports, employs more than 700 staff in France. Google reported revenues of €216m for its French operation in 2014, paying €5m in tax. However, advertising researchers put its actual revenues at about €1.7bn for that year.
 

Google’s troubles with the French tax authorities began with a series of raids in 2011, when several searches of its premises in Paris were conducted in the course of an inquiry into transfer pricing.
 

Used by multinationals to shelter profits generated in major markets, where tax rates tend to be higher, transfer pricing works by shunting money into lower tax jurisdictions.
 

Two years ago, Google notified the US stock market regulator that it was subject to a tax inquiry. The firm declared: “In March 2014, we received a tax assessment from the French tax authorities. We believe an adequate provision has been made and it is more likely than not that our tax position will be sustained. However, it is reasonably possible that resolution with the French tax authorities could result in an adjustment to our tax position.”
 

Unconfirmed reports at the time suggested the group had received demands for €500m and even €1bn in unpaid taxes.
 

France has clamped down on aggressive tax optimisation techniques by multinational companies, and – looking to shore up fragile state accounts – has launched a campaign to encourage taxpayers to come clean on previously undeclared assets held abroad. The crackdown has yielded €12.2bn in 2015, up almost a fifth from the previous year.
 

Big multinationals have not been spared. French authorities recently sent McDonald’s France a €300m bill for unpaid taxes on profits believed to have been funnelled through Luxembourg and Switzerland, the business magazine L’Expansion reported last month.
 

Annexure III
 

BEPS Action 1 Report on addressing the Tax Challenges of The Digital Economy
 

Chapter 9. Paragraph 9.5 Evaluation – sub para 357:
 

Refer to Part VI Paragraph I.10 above
 

“357. As regards the different options analysed, the TFDE has concluded that:
 

(See on page 137):
 

“• Countries could, however, introduce any of the options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties. The adoption of the options as domestic law measures could be considered, for example, if a country concludes that BEPS issues exacerbated by the digital economy are not fully addressed, or to account for the time lag between agreement on the measures to tackle BEPS at the international level and their actual implementation and application. The options may provide broad safeguards against BEPS and ensure that a domestic taxing right is available for remote transactions involving digital goods and services, which is currently not the case under most countries’ domestic laws. Countries could take this approach with the intent to address their concerns about BEPS issues in the short term and gain practical experience with the application of the options over time, fostering co ordinated domestic law approaches and informing possible future discussions. In addition, countries could bilaterally agree to include any of the options in their tax treaties.
 

“• Adoption as domestic law measures would require further calibration of the options in order to provide additional clarity about the details, as well as some adaptation to ensure consistency with existing international legal commitments . Consistency with bilateral tax treaty obligations would have to be ensured, for example by applying the options solely with respect to residents of non-treaty countries, or in situations in which benefits of the treaty may be denied due to the application of antiabuse rules that are in conformity with tax treaty obligations.”
 

Annexure IV Disruptive Technologies
 

1. Technologies are changing fast. In technology and modern business fields; we hear about “Disruptive Technologies”.
 


New technologies completely change the way business is done. They give tough competition to the old business. Some old businessmen change their business methods and adapt to new technologies. Some don’t. Those who don’t; get hurt.
 

Illustrations:
a. Kodak Company. Once upon a time, Kodak was the largest seller of photographic films and papers. It employed 1,75,000 people. With the advent of electronic cameras and smart phones, the film & paper became redundant. Kodak could not adapt to electronics. It got insolvent.
 

b. Once, not long back, Black Berry ruled the roost. Now it is gone.
 

This is the force of Disruptive Technologies. This process of change is now accelerating exponentially.
 

Tax laws must evolve to cater to fast changing modern business. If the law does not change, it will be causing injustice and will soon lose respect.
OECD is not meeting the challenge of disruptive technologies. After 20 years of work on E-Commerce taxation, it still wants five more years. Can the world wait for 5 more years?
 

2. Evolving Tax Judicial trend.
 

Judiciary in India is becoming strict. See the Madras High Court decision in the case of Mr. T. Rajkumar and others Vs. Union of India & others. In this case, the assesse challenged Constitutional Validity of Sec. 94A and the Notification No. 86 /2013 dated 1st November, 2013 notifying Cyprus as un-cooperative country u/s. 94A.
 

The Honourable High Court upheld the constitutional validity of the section and the notification.
 

In doing so,
 

(i) it distinguished SC decisions in the cases of “Azadi Bachao Andolan” and “Kulandgan Chettiar’s case”
 

And
 

(ii) The High Court relied on inter alia G20 declarations to note that the world has united against tax avoidance. HC declared – “A tax avoider and a tax haven assisting tax avoidance cannot seek protection under DTA”.
 

We may notice the trend in judiciary. This is completely “Out of Box thinking”.
 

3. See Bomaby high Court decision in Soignee Kothari’s case. (Bombay HC decision of 5th April, 2016.) Tax consultants may take any stand in academic conferences. But in courts, the scene is changing.
 

Is the profession ready for it?
 

 
 

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