THE GIST of Editorial for UPSC Exams : 07 August 2020 (A global solution for the digital world (Indian Express))

A global solution for the digital world (Indian Express)

Mains Paper 2: International 
Prelims level:OECD
Mains level:  Effect of policies and politics of developed and developing countries on India’s interests

Context:

• The process to reform international tax rules, that began in 2012, arose primarily because under the existing corporate tax system, traditional businesses were taxed on conventional principles. 
• However, digital companies paid low taxes by locating their intellectual property in low tax jurisdictions and more so by having minimal or no taxable presence in the market. 
• Therefore, their profits are not commensurateto their revenues in markets such as India.

 OECD:

• The Organisation for Economic Co-operation and Development is an intergovernmental economic organisation with 37 member countries, founded in 1961 to stimulate economic progress and world trade. 

Conflicting proposals:

• In trying to find a solution agreeable to all, multilateral relations have been tested repeatedly. To begin with, conflicting proposals were made by countries. 
• Some suggested that existing rules were enough and could be updated to appropriately tax profits of digital companies. 
• Others, including India, stressed that a new basis to establish the taxable presence of these remotely operable companies is necessary. 
• Nevertheless, the inescapable trade-off between consensus and tax sovereignty remained. 
• To strike a balance, the OECD weaved various proposals by the US, the UK and India into a unified approach. 
• Even though the proposal sought to implement a simplified approach, it was fraught with a series of practical complexities. 
• The most crucial among these being identifying a non-routine profit from a routine profit. 
• To add to this, the process of implementation would itself require a significant departure from the existing dispute resolution mechanisms.

 OECD:

• The OECD assured market jurisdictions that down the line, international tax rules will be re-examined and reformed so that tax is paid duly in countries that are the source of such incomes. 
• However, as the timelines for the finalisation of the programme drew closer, chances of an agreeable outcome seemed bleak.
• Heightening apprehensions of an impasse, the US announced, in February 2020, that it would implement a unified approach on a safe harbour basis. 
• The desire for such exclusion would render the agreement meaningless considering that most big technology companies are residents of the US. 
• The OECD’s estimates were no more encouraging — the proposal, if implemented, would bring 1- 2 per cent of current corporate tax revenues.

 Consensus based solution:

• Thereafter, with the outbreak of the coronavirus pandemic and the consequent slump in economic activity, governments turned their attention to domestic issues. 
• To find an interim fix, countries began implementing digital services tax (DST) on gross revenues from online advertising and e-commerce sales. 
• India expanded the scope of equalisation levy in March 2020, earlier applicable only to online advertising, to the sale of goods and services by e-commerce operators. 
• Others, such as Indonesia, introduced the electronic transaction tax and the UK passed the digital services tax. 
• Further, the US’s vacillation over the proposal in June was no assurance of an imminentglobal solution. 
• The US Treasury Secretary expressed that the US was inclined to pause the digital tax talks.
• Shortly after, as other countries remained committed to proceed, the US clarified that a consensus based solution was ideal and it would participate in the July talks.

USTR:

• The Office of the United States Trade Representative (USTR) is the United States government agency responsible for developing and recommending United States trade policy to the president of the United States.
• It conducting trade negotiations at bilateral and multilateral levels, and coordinating trade policy within the government through the interagency Trade Policy Staff Committee (TPSC) and Trade Policy Review Group (TPRG).

 USTR investigations:

• In the meantime to stall the proliferationof digital taxes, USTR investigations, under Section 301 of Trade Act 1974, have also been launched against 10 countries, including India. 
• The investigation will examine if the tax is unfair, unreasonable and unequitable. Consequently, retaliatory tariffs may be imposed to recover the costs of such taxes. 
• The USTR investigations have a long history and are ironically unilaterally initiated. 
• It also isn’t the first time that the US and the EU have attempted to settle their disagreement on tax matters by invoking WTO rules. 
• In 2017, the US’s sweeping “reform” of the tax system included a foreign deduction of intangible incomes — a provision that the EU described as an export subsidy to US corporations by allowing export linked tax deductions.
• Nevertheless, investigations are underway and a group of companies in the Silicon Valley have made their submission characterising DSTs as discriminatory and a form of leverage to nudge the US to negotiate. 
• On the contrary, India has clarified that the lower thresholds for the application of the tax would apply more widely to companies of many jurisdictions and is entirely consistent with India’s position under the WTO. 
• Since it was implemented on April 1 2020, it has not been retrospectively applied and India remains committed to the multilateral process. 
• The threat of the imposition of tariffs comes at a time when there is an unprecedented slowdown in global trade. 
• The imposition of tariffs must therefore be weighed against their costs to the domestic economy. 

Conclusion:

• Despite the recent developments, the G20 remains committed to the process. OECD has set itself an ambitious target and announced that it will deliver the blueprints of design by October this year. 
• While some allude to a consensus, it is amply clear that the hopes from the process are varied. 
• To avoid the mutual costs from trade wars, perhaps efforts to modify DSTs into a simpler withholding tax may pave the way for desired reform.
• A multilateral approach is needed to resolve concerns over digital taxes.

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Prelims Questions:

Q.1) With reference to the HAMMER missiles, consider the following statements:
1. France has recently agreed to supply HAMMER missiles to India for the Rafale combat aircraft.
2. It has been developed by Safran Electronics & Defense for the French Air Force and Navy.

Which of the statements given above is/are correct?
A.   1 only
B.   2 only
C.   Both 1 and 2
D.   None 

Answer: C

Mains Questions:
Q.1)A multilateral approach is needed to resolve concerns over digital taxes. Comment.