IT is ironic that the USA that exposed the tax games played by its own multinationals in the famous senate Permanent Sub-committee hearings in 2013, has now officially walked out of the most contentious of the OECD-led BEPS action plan 1 -addressing tax challenges of the digital economy. According to Financial Times, Steven Mnuchin, the US Treasury Secretary has sent a letter on June 12th to his counterparts in Europe conveying his decision to withdraw from the talks on the global effort to tax profits of MNCs under the banner of the so-called inclusive Framework.

We may recall the twists and turns of the tortious talks on the subject of taxation of digital companies since 2012. The OECD started the work on the Base Erosion and Profit Shifting Project at the behest of the western countries concerned about their tax revenues and facing fiscal difficulties resulting from the financial crisis that originated in the US and spread to the west. Countries are yet to come out of the same and now we have a Chinese gift to the world- the COVID-19, which is putting a severe strain on all the economies and we are in the midst of a global recession. The BEPS project that is dominated by the OECD member countries produced 15 Action Plans and a Multilateral Instrument - the MLI. The OECD had placed its action plan on addressing the tax challenges of digital economy at the number one position. Yet, this is one point where there is no consensus as yet.

The OECD has the reputation of coming out with its projects in a timely manner. Despite warnings by scholars, it set out a very ambitious time line for completing its project that involved substantially overhauling the century-old international tax regime. In the process, it has also tried to transform itself as a global body and invited other developing countries who had no say in the deliberations to sign up and be part of the Inclusive Framework that now comprises 137 countries and jurisdictions. Whatever be the merits of such a move, all these countries are now supposed to be working 'on an equal footing' to find a solution to the vexed problem by the end of 2020. Even considering that the members of such a heterogeneous group of countries badly equipped to come up with coherent solutions and despite warnings by the scholars that the timeline was unrealistic considering the multitude of options and opinions among the scholars, the OECD proceeded with its project at break-neck speed. In fact, so impatient was the OECD with the deliberations that at the end of 2019, the OECD secretariat came up with its own solution - the unified approach.

In the Final report on OECD Action plan1 in 2015, it was decided by the Task Force on Digital Economy that work on the project will continue. There were 3 solutions that were being contemplated- a significant economic presence concept, a final withholding tax on certain digital transactions ;an equalisation levy. Significant economic presence was the main objective that countries were to strive for and in the interim countries could impose equalization levy or withholding tax on digital payments subject to certain caveats as an interim measure.

Having flagged the unfairness of the extant taxation system in the digital sphere for a long time that the OECD chose to ignore for decades, India was the first country to impose an equalisation levy, as sanctioned (though not recommended) by the OECD itself. It had appointed an expert committee that had considered various options and chose the equalisation levy as the safest option in the interim and preferring SEP as the long-term objective. The Committee had in fact suggested that the levy be imposed on (i) online advertising or any services, rights or use of software for online advertising, including advertising on radio & television; (ii) digital advertising space; (iii) designing, creating, hosting or maintenance of website ; (iv) digital space for website, advertising, e-mails, online computing, blogs, online content, online data or any other online facility; (v) any provision, facility or service for uploading, storing or distribution of digital content; (vi) online collection or processing of data related to online users in India; (vii) any facility or service for online sale of goods or services or collecting online payments; (viii) development or maintenance of participative online networks; (ix) use or right to use or download online music, online movies, online games, online books or online software, without a right to make and distribute any copies thereof; (x) online news, online search, online maps or global positioning system applications; (xi) online software applications accessed or downloaded through internet or telecommunication networks; (xii) online software computing facility of any kind for any purpose; and (xiii) reimbursement of expenses of a nature that are included in any of the above

In the 2016 budget, the EQ levy was imposed. It was restricted to online advertisements alone and was kept out of the Income Tax Act ; the levy was to be paid by the payer, not by the non-resident service provider. Although it was criticised, but, perhaps due to the fact that there was no compliance obligation on the part of the non-residents per se, it has worked more or less smoothly so far. Then in 2017, India introduced the concept of significant economic presence in the domestic law but its operation has been postponed in the hope that the Inclusive Framework that is working on the same might come out with a solution and the rules framed should correspond with the same.

In the meantime, a fierce debate ensued elsewhere about the same two topics in other parts of the world. The EU proposed a digital service tax as an interim solution and an economic presence concept as a final solution. But even within the EU, there was opposition primarily from Ireland, Luxembourg, Sweden that opposed the DST concept. As a result, no unified approach could be adopted by the member countries and each country went its own way. Italy imposed its DST @ 3%. France also passed a law imposing DST @ 2%. But its ambit specifically excluded the European companies and mainly focussed on American companies, the reason why the Tax is also known as GAFA ( Google, Amazon, Facebook, Apple) tax in France. This got the goat of the USA and USA threatened retaliatory tariffs under its section 301 of the Trade Act, 1974. The UK also proposed a DST. Spain is also contemplating levying a DST that is expected to generate so much of revenue.

As mentioned earlier, the Indian EQ was earlier restricted to online advertisement. Unfortunately, it is not known as to how much revenue is actually collected from the EQ. News reports suggest that the extant levy has collected about 1000 crores per year. That is not really much.

Then in the Finance Act 2020, India amended the Finance Act 2016 and expanded the scope of the EQ. It is supposed to come into force from 1.4.2020. There was no hint of an amendment in the EQ in the Finance Bill 2020 that was presented in the Parliament. Suddenly, at the time of the passing of the Bill, through Government amendment, a change was made in the Finance Act 2016. It is therefore fair to say that there was no discussion in the public domain about the merits and demerits of the change that was made effective from 1st of April, 2020, i.e. within a few days of the passing of the Bill.

Briefly speaking, the Finance Act made the following changes in the EQ levy. Section 165 of the Finance Act 2016 imposed the EQ levy of 6% on of the amount of consideration for any online advertisement, or any provision for digital advertising space or any other facility or service for the purpose of online advertisement  by a resident or a non-resident having a PE in India. The government had kept the power to notify any other services in the future.

However, instead of extending the scope in this way, through the Finance Act, 2020, a new Section 165A has been inserted that charges an equalisation levy @2% of the amount of consideration received or receivable by an e-commerce operator from e-com supply or services made or provided or facilitated by the e-com operator to an Indian resident, or even to a non-resident in certain circumstances or to a person who buys such goods or services or both using an Indian IP address.

The new levy will not apply where the e-com operator has a PE in India through which the supply etc is made; or where the existing EQ levy is chargeable u/s 165; or where the gross turnover/receipts are less than INR 2 crores (20 million)

The circumstances where the supply by a non-resident e-com operator to another non-resident will come under the ambit of the EQ levy are as follows:

- Sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through an IP address in India; and sale of data, collected from a person who is resident in India or from a person who uses IP address in India.

And who is an e-com operator? This is defined as follows:

- "e-commerce operator" means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both"

And what does e-commerce supply of services mean?

- It means- online sale of goods owned by the e-com operator; or online provision of services; or facilitation of such online sale of goods or provision of services or any combination of such activities.

Unlike the existing EQ levy, the responsibility of collection and remittance of the EQ under the new provision to the government now rests on the non-resident operator.

Thus, now there are two types of EQ levy in India - the earlier levy of 6% on specified services (online advertisement) collected from the resident or non-resident payer continues. The new levy of 2% is essentially for provision of or facilitation of supply of goods or services by a non-resident. It has, of course, been clarified that where the old EQ applies, the new EQ will not again apply. Thus, there will be no double taxation on the same services. Importantly, section 10(50) exempts the income, if any from the supply of services/goods by the Non-residents. However, this exemption has been made available in respect of transactions from 1.4.2021 although the levy is effective from 1.4.2020.

The Finance Act was passed by the Parliament on the 22 nd March, 2020 and received the assent of the President on 27th March, 2020. On the 27th March itself, seven industry associations- Coalition of Services Industries, Internet Association, Computer & Communications Industry Association, ITI, Comp TIA, USCIB,US-India Strategic Partnership Forum (apparently representing Google, Facebook, Amazon, Microsoft, Adobe etc.) wrote a letter to Robert E. Lighthizer, US Trade Representative, complaining about the levy on the ground that it directly discriminates against U.S firms and exports while exempting Indian Firms; that its scope is significantly larger than that of national European DSTs and that it detracts from efforts at the OECD and sets a problematic precedent. Citing challenges of directly engaging with the Indian government during the pandemic, the letter sought the engagement of the USTR for its withdrawal.

(Letter available at: https://internetassociation.org/wp-content/uploads/2020/04/IA_India-EL-Multiassociation-Letter-USTR_March-2020_Trade.pdf)

Subsequently, on the 29th of April, 2020 another group of industry associations- Allied for Startups, Asia Internet Coalition(AIC), Asia Pacific MSMSE Trade Coalition (AMTC), Australian Services Roundtable (ASR), Digital Europe, Information Technology Council (ITI), Japan Electronics and Information Technology Industries Association (JEITA), U.S Chamber of Commerce and US- India Business Council (USIBC) wrote to the Indian Finance Minister requesting for consultation and delay the Equalisation Levy Expansion pointing out that "(…)the timeframe within which this new measure was approved and entered into force allowed for neither dialogue nor the significant structural changes that would be necessary for the impacted firms to effectively implement a levy of this scope and complexity."

https://www.itic.org/policy/MultiassociationLetteronIndiaELExpansion29Apr2020.pdf

There are indeed some issues relating to the new levy regarding its scope as has been pointed out by commentators. It is also true that payments from non-residents to non-residents can also be covered in certain circumstances. But that is not something that is unheard of in the area of international taxation. In fact, the levy can be a favourable option for service providers where the nature of such services can be treated as royalties of Fees for technical services in view of the exemption provided by Section 10(50). A 2% levy on gross revenue may be a better option for the non-resident service providers. The only genuine problem one sees is the in the compliance by the affected companies for the current fiscal. These issues can easily be sorted out by the CBDT through a circular.

As already mentioned, France had also imposed a digital service tax and that specifically excluded the European Companies. This had infuriated the US administration that threatened to impose tariffs on the French products imported in the USA. Subsequently, It was agreed at the political level that the levy will be kept in abeyance till the end of 2020 to facilitate the global work on Action Plan 1 under the aegis of the OECD and the Inclusive Framework which was supposed to come out with its report by the end of 2020 and OECD was rushing forward with its plan that few could understand and had very little to offer to the developing countries.

The USA has been a reluctant participant in the BEPS project and its participation was meant only to protect the American interests for which it demanded and mostly got concessions from others. It has not accepted the MLI that 94 countries have agreed to till date. The fact that the US multinationals have eroded the tax base of other countries is testified by the fact that tech giants have paid up voluntarily millions of euros as compensation in several European jurisdictions. The European countries including the closest ally of the USA, the UK and the EU were all considering imposition of some kind of DST to garner revenue in these hard times.

The USA will have none of it. On the 2nd June, it launched 301 investigations against the following countries: Austria, Brazil, the Czech Republic, EU, India, Indonesia, Italy, Spain, Turkey and the UK. In the Federal Register Notice subsequently issued the summary of the measures adopted by these countries/organisations have been mentioned as follows:

Austria: In October 2019, Austria adopted a DST that applies a 5% tax to revenues from online advertising services. The law went into force on January 1, 2020. The tax applies only to companies with at least €750 million in annual global revenues for all services and €25 million in in-country revenues for covered digital services.

Brazil: Brazil is considering a legislative proposal entitled the "Contribution for Intervention in the Economic Domain" or CIDE. If adopted, CIDE would apply to the gross revenue derived from digital services provided by large technology companies.

The Czech Republic: The Parliament of the Czech Republic is considering a draft law that would apply a 7% DST to revenues from targeted advertising and digital interface services. The tax would apply only to companies generating €750 million in annual global revenues for all services and CZK 50 million in in-country revenues for covered digital services.

The European Union: The European Commission is considering a DST as part of the financing package for its proposed COVID-19 recovery plan. The EU DST is based on a 2018 DST proposal that was not adopted. The 2018 EU proposal included a 3% tax on revenues from targeted advertising and digital interface services, and would have applied only to companies generating at least €750 million in global revenues from covered digital services and at least €50 million in EU-wide revenues for covered digital services.

India: In March 2020, India adopted a 2% DST. The tax only applies only to non- resident companies, and covers online sales of goods and services to, or aimed at, persons in India. The tax applies only to companies with annual revenues in excess of approximately Rs. 20 million (approximately US$ $267,000). The tax went into effect on April 1, 2020.

Indonesia: Earlier this year, Indonesia adopted an electronic transaction tax that targets cross-border, digital transactions. Further implementing measures are required for the new tax to go into effect.

Italy: Italy has adopted a DST. The measure includes a 3% tax on revenues from targeted advertising and digital interface services. This tax applies only to companies generating at least €750 million in global revenues for all services and €5.5 million in in- country revenues for covered digital services. The tax applies as of January 1, 2020.

Spain: Spain is considering a draft DST. The measure would apply a 3% tax to revenues from targeted advertising and digital interface services. This tax would apply only to companies generating at least €750 million in global revenues for all services and €3 million in in-country revenues for covered digital services.

Turkey: Turkey has adopted a DST. The measure applies a 7.5% tax to revenues from targeted advertising, social media and digital interface services. The tax applies only to companies generating €750 million in global revenues from covered digital services and TL20 million in in-country revenues from covered digital services. The Turkish President has authority to increase the tax rate up to 15%. The law went into effect on March 1, 2020.

The United Kingdom: The United Kingdom is considering a DST proposal as part of its Finance Bill 2020. The measure would apply a 2% tax on revenues above £25 million to internet search engines, social media, and online marketplaces. The tax applies only to companies generating at least £500 million in global revenues from covered digital services and £25 million in in-country revenues from covered digital services. The bill is in the final stages of adoption by Parliament, and if passed, payments would be due from affected companies in 2021.

Pursuant to section 304 of the Trade Act, the U.S. Trade Representative must determine whether the act, policy, or practice under investigation is actionable under Section 301. If that determination is affirmative, the U.S. Trade Representative must determine what action to take.

The investigation initially will focus on the following concerns with DSTs: discrimination against U.S. companies; retroactivity; and possibly unreasonable tax policy. With respect to tax policy, the DSTs may diverge from norms reflected in the U.S. tax system and the international tax system in several respects. These departures may include: extraterritoriality; taxing revenue not income; and a purpose of penalizing particular technology companies for their commercial success.

So, essentially now it is the USA v everybody else. On top of it, according to Financial Times, on the 12th of June, 2020, Steven Mnuchin has written to his EU counterparts withdrawing from the OECD led talks on the unified approach for taxation of multinational companies.

On the 17th of June Mr. Lighthizer testified before the House Ways and means committee on the 2020 Trade policy of the USA for almost 4 hours. He was questioned about the withdrawal of the USA from the talks. Considering the importance of the issue, it will be interesting to reproduce the relevant conversation:

Mr Don Beyer (D-VA):

"(…) The Financial Times has reported that Secretary Mnuchin has sent a letter to the EU counterparts about digital service taxes and pulling out of these digital service tax negotiations and obviously you know there is an existing 301 investigation on DSTs and you know many American businesses are rightfully concerned about that. But Can you give us any perspective on the administration's negotiations here? On why they pulled out of negotiations on DST?

Answer:

The context is this. We have a situation where a variety of countries have decided that the easiest way to raise revenue is to tax somebody else's companies and they happen to be ours and they are also in a position where this is like a leading US industry right, this whole digital trade area.

So (unclear) Senator Russel Long used to say, most of you have always heard this- Don't tax you, don't tax me, tax the man behind the tree. This is an example of that. The United States will not let that happen.

So we had a process. We put in place these 301s so that we can take action if people treat us unfairly and burdens or (unclear) Congress. We had negotiations going on. We have found at least till now that we were not making any progress on Pillar 1 which is the most important pillar there. The other people getting together decided that they are going to take action against the US without our acquiescence, something that is not acceptable.

If you ask me what's the answer- the answer is that we need an international regime that not only focuses on certain size and certain industries but where we generally agree as to how we are going to tax people internationally. So, I think there is clearly room for negotiated settlement.

At that point we were making no headway and the Secretary made the decision that rather than have them go off on their own, he would just say -we are no longer involved in the negotiations.

But if you are really interested in this, I will be happy to sit down and go through with you on the topic because I have lots of ideas on this."

https://waysandmeans.house.gov/legislation/hearings/2020-trade-policy-agenda

Apparently, the USA wanted to halt the process because of the COVID crisis. However, the reaction in Europe, particularly in France has been furious. On the 18th of June, 2020, appearing in a programme of France Inter, in response to a question by Julia Jackson as to whether, as reported by Financial Times, he has received a letter from Treasury Secretary Steven Mnuchin that the USA has withdrawn from the talks on the taxation of the digital companies, Bruno Le Maire, the French Finance Minister replied that he, along with his counterparts in Britain, Italy and Spain, has indeed received such a letter.

He called this a provocation. It's a provocation against all the partners in the OECD when they were just centimetres away from an agreement on the taxation of the digital giants. At the precise moment when the digital giants were the only ones to have derived immense profits during the coronavirus time. Therefore it is a provocation not only against the work done by the OECD but against citizens of the entire world who think that the digital giants should pay their fair share of taxes.

Asked whether France will go ahead with its digital tax proposal, he said that either the US should come back to the negotiating table and there is an agreed solution by the end of 2020 else France will apply its national legislation. He insisted that there will be digital tax in France in 2020. He also questioned the threat of sanctions used by the USA particularly against its own allies at the drop of a hat. You do not do this- we impose sanctions on you. Is it a way of treating your allies?

He also confirmed having issued a joint reply (along with the UK, Italy and Spain) to the Treasury Secretary and pointed out that the speed with which the reply was sent confirms the convictions of the signatories. They responded that they wanted a fair taxation of the digital giants under the aegis of the OECD as quickly as possible.

(My free summary of parts of the interview available at:

https://www.franceinter.fr/emissions/l-invite-de-7h50/l-invite-de-7h50-18-juin-2020)

India has imposed Equalisation Levy since 2016 but there was no reaction from the USA. This time, perhaps goaded by the representations mentioned earlier, the USA has included India also in its list of 301 investigation. The Indian levy obviously does not discriminate against US companies; any foreign company will be liable considering the low threshold level. Besides, national interest perhaps requires raising domestic resources in these difficult times. The levy may in fact turn out to be beneficial to non-residents in certain circumstances. Whether the USA will be convinced or not remains to be seen. In the meantime, it has been reported on the 5th of July, 2020 that the GOI is having a rethink in the matter and apparently a cost-benefit analysis is being carried out in respect of the 6% levy that can easily be passed on to the Indian payer. https://economictimes.indiatimes.com/news/economy/policy/google-tax-government-re-thinking-equalisation-levy/articleshow/76207747.cms. One has to wait and see whether the current geo-political considerations will have any effect on this space.