Adopt 'significant economic presence' concept to tax digital companies: India at G20 meet

India has made a strong case for adoption of "significant economic presence" concept for taxing global digital companies and close cooperation among the G-20 member nations to deal with fugitive economic offenders who flee their countries to escape consequences of the law.

During her interactions at the two-day G-20 meeting of Finance Ministers and Central Bank Governors at Fukuoka in Japan, Finance Minister Nirmala Sitharaman also pitched for development of a common defensive toolkit of measures to deal with non-compliant tax jurisdictions or nations which refuse to share tax related information.

Besides Sitharaman, Finance Secretary Subhash Chandra Garg and Reserve Bank Deputy Governor Viral Acharya participated at the ministerial and central bank governors meeting of the G-20, which is a grouping of developed and developing nations.

A Finance Ministry statement said that during the G-20 meeting, Sitharaman noted the urgency to fix the issue of determining right nexus and profit allocation solution for taxing the profits made by digital economy companies.

"FM noted that the work on tax challenges arising from the digitalization of the economy is entering a critical phase with an update to the G20, due next year.

"In this respect, the FM strongly supported the potential solution based on the concept of 'significant economic presence' of businesses taking into account the evidence of their purposeful and sustained interaction with the economy of a country," the statement said.

Sitharaman expressed confidence that a consensus-based global solution, which should also be equitable and simple, would be reached by 2020.

She said with almost 90 jurisdictions now adopting the automatic exchange of financial account information (AEOI), it would ensure that tax evaders could no more hide their offshore financial accounts from the tax administration.

She urged the G20/Global Forum to further expand the network of automatic exchanges by identifying jurisdictions, including developing countries and financial centres that are relevant but have not yet committed to any timeline.

"Appropriate action needs to be taken against non-compliant jurisdictions. In this respect she called upon the international community to agree on a toolkit of defensive measures, which can be taken against such non-compliant jurisdictions, the statement said.

India, through the Finance Act, 2018, had introduced the concept of 'Significant Economic Presence' (SEP) in the Income Tax Act for taxation of non-residents in India or global digital companies such as Amazon, Google, Netflix, Facebook and Twitter, by increasing the scope of the definition of 'business connection'.

For this purpose, SEP was defined to mean any transaction in respect of any goods, services or property carried out by a non-resident in India including the provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed.

Also systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means would constitute as SEP.

Speaking at the Ministerial Symposium on International Taxation, the Minister raised the need for international cooperation on dealing with fugitive economic offenders who flee their countries to escape from the consequences of the law.

"FM urged that closer collaboration and coordinated action were required to bring such economic offenders to face the law," the statement added.

Sitharaman also highlighted the need for the G-20 to keep a close watch on global current account imbalances to ensure that they do not result in excessive global volatility and tensions.

"The global imbalances left a detrimental impact on the growth of emerging markets. Unilateral actions taken by some advanced economies adversely affect the exports and the inward flow of investments in these economies," the statement said.

She also urged the G-20 to remain cognizant of fluctuations in the international oil market and study measures that can bring benefits to both the oil exporting and importing countries.