Opinion | Time for a global tax net for the internet

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At the G20 meeting of finance ministers and central bank governors held last week in Fukuoka, Japan, India’s finance minister Nirmala Sitharaman did well to support the broad idea of a digital service tax levied on global online businesses that would be shared by various countries in some proportion. Details of the proposal are sketchy, but if it is accepted, it would mean that digital money-generators such as Facebook and Google will have to pay India some taxes, regardless of whether or not they are incorporated here and report local earnings. Though the US staunchly opposes it, given that most of the world’s tech majors are headquartered there, other countries such as Japan, the UK and France are also in favour of working out a global deal that would let the rest of the world get a “fair share” of taxes. After all, a significant proportion of the internet user base on which they thrive is located in countries that get virtually nothing from their commercial success.

Admittedly, the global digital economy is not easy to pin down from a taxation perspective. For most regular businesses, the rules of tax jurisdiction are clear. Local transactions that are fully executed within the country can be tracked and taxed. But much slips through the taxation net. Business models for online enterprises are complex, often mirroring media vehicles that rely on revenues not from their users, but from advertisers who want to reach those users. So if money is made on advertising aimed at an online audience that spans multiple borders, for example, it gets away without having to pay taxes in most of the countries that make up that target group. There are other aspects of value creation that are difficult to monitor as well, especially those arising from the use of algorithms and user information. Large troves of data can be monetized in various ways. Local informational “resources” have made many firms wealthy. That they owe us something back is at the core of the argument for casting a wide tax net across the internet. The big question is: How to do it?

It was the European Union that first floated the idea of a shared digital service tax (DST). Its intent was to establish a common system for the taxation of online services. Under it, any firm set up in a member state offering digital services in other EU states would have to pay a 3% DST in each member state where revenue is generated. That it did not get off the ground is a sign of how difficult achieving a consensus on such matters is. On India’s part, the government’s 2016 introduction of a 6% equalization levy was aimed at taxing ads placed by Indian entities on global social media platforms. Today, all commercial entities with a “significant economic presence” in India are expected to contribute to the country’s coffers. If only paltry sums have been mopped up this way, it’s but a reminder of how tough the task of enforcement is. International businesses that follow foreign reporting rules are not always required to offer revenue and profit breakups country by country; this complicates tax assessment efforts. The hard truth is that online businesses are structured in ways that transcend national boundaries. Tax-haven shopping is common, too. Unless there is global cooperation on instituting a global tax-sharing system for online businesses, one that is acceptable to all, little progress on the idea can be expected. Yet, we must not give up.

[“source=livemint”]