Global business models have undergone an unprecedented change with the advent of the ‘digital economy’. From purchase of tangible goods online to purchase of downloadable games, music, e-books, applications, etc, to availing of services/infrastructure under the innovative cloud computing concept or online advertising formats—making all this possible on-the-go through even the smallest of devices such as mobile phones—digital economy has transformed the traditional brick-and-mortar economy as we know and has made life a lot easier and exciting. The onset of the digital economy and its potential impact, including the quite politicised ‘tax planning’ angle, has led to much deliberation in recent times. But why the sudden hype? The answer could be in the staggering numbers—the global e-commerce market was expected to have reached $16 trillion in 2013.
Tax-policy makers and implementers globally are increasingly realising that conventional tax concepts framed to cater to the traditional economy are not suited to the evolving business models in the digital economy, resulting in leakage of desired tax revenues. Adding fuel to the fire is the perceived ‘abusive tax planning’ by MNCs. This has led to a need to check practices involving shifting profits to low tax jurisdictions and thus, eroding the tax base of a nation, commonly referred to as Base Erosion and Profit Shifting (BEPS). To check BEPS in the digital economy, the Organization for Economic Cooperation and Development (OECD) has released a discussion draft on March 24 which identifies and seeks to address tax challenges in the digital economy landscape.
The OECD report highlights the wide gap between the traditional tax rules and the manner in which business is conducted in the digital economy, as the current tax laws are focused primarily on physical presence by the non-resident seller/service provider or through agents while such factors are inconsequential in the digital economy. To illustrate, in the digital economy, delivery of services in India, for instance streaming of video content or provision of online platforms, can be easily done from overseas without necessitating any part of the activity being performed or any employees being hired in India, thereby avoiding a taxable presence in India although significant revenues are earned from customers in India. This is aggravated by the fact that organisations providing such services from overseas may use an entity based in a low-tax jurisdiction to earn the primary revenues from such activities and accumulate income there. Another aspect that merits attention is