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India backs away from digital services tax after US pressure

Will keep taxing, but consider payments as credits for future global tax regime

India has agreed to wind back the two per cent Equalisation Levy it charges foreign e-commerce companies, and the USA has withdrawn sanctions it imposed to protest the levy.

The levy was introduced in 2016 as a means of ensuring India could collect more tax. The nation's government introduced it because big e-commerce players had employed legal-but-cynical tax minimisation schemes that saw them conduct purchases made in India with offshore entities – even though goods were sold in India, to residents of India.

The measure was aimed squarely at US-based companies such as Amazon.com, but also at India-based companies like FlipKart (which is owned by US-based Walmart).

The USA opposed India's levy and similar taxes imposed by Vietnam, The Philippines, and Indonesia, arguing they discriminate against its businesses.

In July 2021, the Biden Administration fought back by imposing tariffs on nations that implement digital services taxes, but immediately suspended that sanction.

The timing of that US action was not random. October meetings of the G20 and OECD saw broad international agreement reached on new global tax rules that will see multinational corporations pay at least 15 per cent of their revenue as tax in each nation where they do business. In theory, that arrangement should mean the likes of Amazon, Apple, Google, and Microsoft must pay tax wherever they operate, instead of being able to shop around for jurisdictions with low tax rates.

Once those deals were inked, the USA dropped its tariff threat.

But India didn't drop its levy, because the new global tax deal is yet to be implemented.

While India and the USA wait for those formalities to be addressed, they'll count the Equalisation Levy as a credit against future taxes, once the new global arrangements kick in. Those credits will accrue from April 1, 2022, until either March 31, 2024, or whenever the tax deals are sorted.

The US Department of Treasury hailed the deal with India as "a pragmatic solution that helps ensure that countries can focus their collective efforts on the successful implementation of the OECD/G20 Inclusive Framework's historic agreement on a new multilateral tax regime". America has also dispensed with its suspended tariffs on India.

India's government noted the agreement but expressed no opinion about its merits.

Austria, France, Italy, Spain, the United Kingdom, and Turkey have already reached similar agreements with the USA.

Tax-avoiding tech giants have been mostly silent on the new arrangements – perhaps because most announced their quarterly results mere days or weeks after the new rules were agreed. The Register expects that investors will soon press for information on how the new tax regime will impact the bottom line. ®

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