The tax department could argue that appointing a nodal or compliance officer in India under the new rules implies the company has a permanent establishment in India, experts said. And that they should therefore pay the appropriate taxes—at least 25 per cent but possibly as much as 42 per cent–on the entire income generated in the country.
As Twitter, Google and Facebook appoint nodal officers to comply with the new information technology (IT) rules, they could see their domestic tax bills jump from this year onward, said people with knowledge of the matter.
Top digital companies do not have a presence or permanent establishment (PE) in India and hence don’t pay domestic taxes on their entire income. The Indian government introduced the equalisation levy—6 per cent on advertising revenue and 2 per cent on digital transactions—to capture the domestic income of these companies. The companies pay tax on a ‘cost-plus basis,’ on about 8-10 per cent of total revenue, similar to an outsourcing unit in India.
That could change this year. The tax department could argue that appointing a nodal or compliance officer in India under the new rules implies the company has a permanent establishment in India, experts said. And that they should therefore pay the appropriate taxes—at least 25 per cent but possibly as much as 42 per cent–on the entire income generated in the country. Over the last two weeks, the digital giants have again reached out to their tax lawyers and advisors seeking a way around this. ET had first written on March 15 that these companies were looking to create structures to circumvent the tax impact. They had been looking to outsource compliance functions but that has been disallowed.
“The government has specifically denied this request. Our client was told that the nodal officer has to be part of the US entity or a separate entity, and neither can this function be outsourced nor can they hire anyone on a temporary or consulting basis,” a lawyer advising one of the three digital giants told ET.
Twitter declined to comment on queries linked to possible tax implications. Google and Facebook didn’t respond to queries.
Tax experts said this requirement would lead to the companies having a permanent establishment in India.
“Appointment of a nodal officer could create a permanent establishment for these digital giants in India and have a huge tax impact from paying 6 per cent equalisation levy to paying about a higher tax on entire income. Also, some of these companies are already litigating the PE aspect in Indian courts, and even that could have a larger impact,” said founder of tax advisory firm Transaction Square, Girish Vanvari.
Another lawyer advising one of the three social media giants told ET that they expect tax demands propping up on this basis “very soon.”
“Our defence is going to be that any compliance that’s mandated by the government doesn’t create a PE for us, because we do not require these functions to operate smoothly. The only reason why we have these functions in India is because we have been forced to have them,” the second lawyer told ET.
PE is a concept in taxation that determines which country has the right to tax a multinational’s income and to what extent. These companies have offices in India but as per tax regulations, it doesn’t bring the entire money made in India under the tax net due to various structures under which they operate. In most cases, income tax is paid by an Indian entity, which can be typically defined as a captive and only charges fees or margins from the foreign subsidiary. Tax is merely levied on fees charged by the Indian entity.