There’s a right way, and a wrong one, to tax digital companies and value chains

India and other countries will do well to stay away from unilateral measures and build a global consensus on how to bring to tax the ‘Big Data’ value chain of global digital companies as well as traditional companies that have a part of their digital value chain in India, a new PwC India paper has suggested.

The paper, titled ‘Big Data: Transfer Pricing Perspective’, highlights that such companies need to start preparing themselves to address the task of determining what portions of their profits (or losses) are attributable to India and other such jurisdictions where they would be deemed to constitute a significant/digital presence and assess the tax risks that may arise on account of the same.

“Given the increasing adoption of digitisation in every walk of life and business, the paper pitches for global consensus building, rather than adoption of unilateral measures, as the latter could seriously harm global trade through double taxation, the cost of which would ultimately be borne by consumers,” Kunj Vaidya, Partner and Leader Transfer Pricing, PwC India told BusinessLine .

Where is value created?

Vaidya said there is a presumption that users (of digital products and services) create all the value. “The biggest perception has been that users create value. I don’t agree with the stance that users are equivalent to the entire value. It’s only a part of it.

There has to be ‘big data’ value chain analysis to understand where (in which jurisdiction) value gets created,” he said. Actually, the data of users is raw data that needs to be processed, cleaned, curated and analytics performed on it before value is derived, he said.

Today, almost every country is introducing unilateral measures on the taxation front to bring the digital economy to tax.

India’s experience

In 2016, India started the equalisation levy in the form of a levy on payments made by residents to a non-resident for online advertisement, provision of digital and advertising space or any other facility or service for online advertisement.

In 2018, India introduced a nexus-based taxation approach in the domestic tax law, deeming a significant economic presence (SEP) for non-residents (to which appropriate income would be attributed) in certain scenarios. The scenarios specified are payments made to a non-resident for goods, services or property, including download of data and software exceeding a prescribed threshold; or soliciting of business activities or interaction with a prescribed number of users using digital means. The relevant thresholds and the number of users are yet to be prescribed by the Indian tax administration.

Treaty commitments

Vaidya said that although India has started SEP, it is not functional as yet. “SEP in India is part of the domestic law and does not override the treaty. So the treaty partners have to accept the revised parameters. By putting SEP, India has created digital PE definition. Until those treaties are modified and renegotiated, it will not be functional”, he said.

Currently, the multilateral or unilateral efforts of countries are only focussed on user data in the context of digital businesses, which exploit such data to generate revenues.

It remains to be seen whether tax policymakers will shift their focus to value being created by some of the traditional businesses through exploitation of industrial or machine data collected from jurisdictions where such value is not being taxed, according to PwC India.

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