Daily Answer Writing
21 January 2021

Q) The greatest challenge of tax evasion comes from digital corporations, which unlike traditional businesses, can operate in a market without a physical presence. Analyse how this challenge can be addressed. 250 Words

Source: IE Editorial Page: The cyber tax conundrum.

Approach Answer:

 

Introduction: Limited tax revenues are a main source to fund the economic development problem is that of many Nations, with emerging markets especially. Thus, the states hope reasonably for the large companies’ contribution, the digital giants especially. However, the global practices prove the economy’ digitalization to open new sources of government revenues forms many opportunities for tax evasion.

 

Understanding Challenges in Taxation of Digital Platforms:

               1. Identification of new tax planning schemes based on digital technologies: the state revenues are at risk, because they just can’t get the tax of the digital companies profits. Often revenue is shifted with a set of complicated transactions. For example: Apple's corporate structure facilitates the money transfer to the low-tax jurisdictions like Ireland with corporate tax rate of 12.5% which is much lower than in the very US.

               2. Detection of tax avoidance schemes built in the digital age: Companies like Google and Facebook are Advertisement giants which collect huge revenues in terms of advertisements from India. And yet their operations are hard to be taxed. We need to device scheme to appropriately tax these transactions.

               3. Identification of the reaction of different groups of countries to the newly emerged tax evasion schemes: For example USTR recently slamed India on its digital tax.  According to it, out of all businesses that it would impact, 72 are from the US.

               4. Taxation optimization under the challenges of the digital age: In turn, it affects seriously the public funding of hospitals, schools, public transport, etc. Besides, the taxation deficiencies under the digital economy affect the health and stability of the competitive environment of online - Commerce.

               5. Discrimination against Domestic players: Domestic companies with physical offices are easy to tap and thus this is a discrimination against them

 

The GAFA (Google, Amazon, Facebook, Apple) alone worth 3 trillion dollars capitalization, making it comparable with states. The digital industry is no longer just a branch of the economy, but a force that changes all spheres of human activity. The digital economy has fostered a winner-takes-all logic.

 

Therefore taxing these transaction is a necessary step that we should be able to understand as soon as possible. One of the reforms international tax law so that digital companies are taxed where economic activities are carried out was formally framed within the OECD’s base erosion and profit shifting programme. The EU and India were among the advocates of this  approach.

 

Addressing the Challenge:

               1. Digital Service Tax: Many countries have either proposed or implemented a digital services tax. It can be an indirect tax on the consumer.

               2. Equalization Levy: Its a direct tax, which is withheld at the time of payment by the service recipient. In India, the two conditions to be met to be liable to the levy: The payment should be made to a non-resident service provider; The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

               3. International rallying for a solution through WTO: To overcome this  challenge, countries have suggested that a new basis to tax, say, the number of users in a country, could address the challenge to some extent. But this would certainly be defended by the US at any cost. For this involving international organizations would be vital.

               4. Using Alternate Dispute Resolution(ADR) with US: All this would also require political consensus on multiple issues, including sensitive matters such as setting up of an alternative dispute resolution process comparable to arbitration.

               5. Understanding digital economy: Apart from the above there is a general need to understand better the functioning of the digital economy. For this is the need of the hour that we institutionalize aittee to look into the matter.

 

Conclusion: The problems of the digital business taxation prove the problems of states to perceive, accept and adapt to the new challenges developed in the era in the economy’ digitalization. Until a general agreement on it happens on a global stage demands for sovereignty to tax is an interim alternative outside tax treaties. It possesses the advantage of taxing incomes that currently escape tax and creates space to negotiate a final, overarching solution to this conundrum.

 

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