The term ‘Tax’ itself acts as a burden on us individuals but when this term associates with the biggest American multinational company named Google, it creates an environment of tension in one’s mind. The term ‘Google tax,’ as complicated as it sounds, rather becomes quite easy to understand when it is broken down into simple words.
The term ‘Google tax’ is popularly referred to as anti-avoidance provision, which becomes yet another head scratching term. Anti-avoidance provisions are nothing but provisions made for the purpose to cease the set of arrangements made by an individual to reduce the taxpayer’s liability for tax. So, in that manner we can call Google tax a provision that intends to stop certain arrangements that would reduce the taxpayer’s liability for tax. In technical language, Google tax is also known as diverted profits tax, which was introduced in the year 2015. This concept is used to counter the problem of profit shifting. Profit shifting is a practice which deals with the profits being diverted to a country which provides a favorable environment to outside businesses and individuals with a minimal or almost nonexistent taxation.
These countries are well known as tax havens and are technically called as low tax jurisdictions; the outside businesses in such countries stand a chance of reducing or avoiding taxes levied in investor’s home country. This was observed when applications like WhatsApp, Instagram and many other popular sites operated by a technology giant: Facebook of the U.S, conducted such practices where they did not even employ any workers from a particular country and still derived huge amount of revenue through online advertisements; and in-app purchases diverted the revenues to a low tax jurisdictions.
The cases of such practices of profit shifting were increasing, when the authorities of countries like the United Kingdom and Australia obtained a full proof data from the report of Securities and Exchange Commission (SEC), which contained the actual amount of revenue that the American businesses generated across the world in order to detect any arrangements made for tax avoidance by the American businesses. To neutralize the effects of profit shifting, the United Kingdom and Australia brought significant changes in their tax laws. The United Kingdom, in the 2015, introduced the diverted profits tax and it was set at a flat rate of 25% levy on all profits that companies had made which were moved artificially to low tax jurisdictions. Similarly, in Australia, the diverted profits tax was implemented from January 2017 onwards at a rate of 40% tax on such tax avoidance practices.
These practices were then gradually realized in India too. It was observed by the authorities that India was losing out on revenue from digital firms billed overseas, in the countries with minimum taxation. The Indian government introduced equalization levy, better known as ‘Google tax’ which was set at a rate of 6% tax on the amount paid to internet companies by advertisers. According to the news reports, India had received ? 1,000 crores till the date of March 2018. In recent news, as of 28th April 2020, the U.S. proposed that the implementation of the Google tax in India could not be as efficient due to India’s data localization plan, issues with cross-border data flow, norms around intellectual property rights, and India favoring local digital products.
Moreover, Google tax adopted by countries helps to collect additional tax revenues and it is ultimately used in providing a favorable environment, in terms of transportation, technology and in other several areas, for businesses operating in that particular country. However, it has been observed that the implementation of such tax policy has off balanced many international relationships and caused a lack of cooperation among nations. This showed that such tax policy is not suitable across jurisdictions for a longer run. To give a conclusion on Google tax, it can be said that it fails to deal with the problem of tax avoidance and it creates more of an issue on a global level then to give a solution for the same. It ultimately is a tax policy made for short run but when implemented on a long-term basis, it tends to disturb international coordination on tax issues.
Written by Ankit Mistry
Sources:
- https://www.exchange4media.com/digital-news/us-says-indias-imposition-of-google-tax-may-hurt-overseas-trade-104335.html
- https://www.businesstoday.in/current/world/tariff-issue-us-cautions-india-against-google-tax-asks-strongly-reconsider/story/402267.html
- https://www.youtube.com/watch?v=PxgyPdSqA3M
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