Digital Companies Scramble To Save
On Tax -
India Tightens Data Laws- 12-12-2019
Global digital giants
are scrambling to explore and find ways for tax arbitrage to get around India’s
personal data protection bill that requires them to have their servers and data
in India.
The fear for companies
such as Google, Facebook, Netflix, Amazon and LinkedIn is that if the servers
sit in India, it would be seen as a permanent establishment (PE) and will
eventually attract higher tax. PE is a concept in taxation that determine which
country has the right to tax a multinational’s income and to what extent.
The underlying
principle of the data protection bill suggests that the companies will have to
retain data of Indian customers in India.
People with direct
knowledge of the matter said these companies are exploring options to reduce
their tax outgo. Many could lease the servers from Indian companies to host the
data to avoid having PE in India. However, tax experts said merely having a
server in India does not automatically mean that the company has a PE in India.
“The law is clear that
such server would be its PE in India if the server is owned by it or is owned
by some other entity and is exclusively at the disposal of such a company. If
the server is leased by many other companies and no specific space is at the
disposal of the company, such a leased server will not create a PE in India and
hence there should be no additional impact on taxation in India,”
Some of the companies
are also exploring another route for tax saving. They may consider creating a
separate company that would own servers and the main entity would only pay
“rent” for using it. This would mean that the Indian income tax will only apply
to the lease or rent income and not the entire revenue.
But tax experts said
that tax laws are never as simple and the taxman will still be in a position to
question these structures as the tax is not on severs but on income generated
from data.
Digital companies may
have their own servers or lease them to store and process data in India. They
need to certify to the government the address where it resides. It’s not the
servers — whether leased or owned — that create a PE, but the data as the
income is from the data and the tax has to be on income earned on such data,”
The tax arbitrage could
be huge for most digital players. Most digital majors only have a small Indian
entity that only have “commissions” or similar income. In many cases, domestic
income shown under the Indian entity is only about 10% of the total revenue.
Indian tax at 35% is only applicable on this portion of the income. The remaining
90% of the income is sent outside India into jurisdictions such as Singapore or
Ireland as royalty payments or similar subheads. This income in best case
scenario faces about 15% tax depending on the tax treaty India has with the
country.
Persons in the know
said most companies will have to create these structures as there are several
other parallel laws that could increase their domestic taxation. One such is
the new Organisation for Economic Co-operation and Development (OECD)
guidelines around digital companies and where they must pay the tax. Most
digital players could be looking to create these structures and start the tax
planning in the next few months, said a person with direct knowledge of the
matter.
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