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What is GAFA tax

What is GAFA tax

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  • GS 3 || Economy || External Sector || International Tax Issues

 Why in News?

  • French finance minister Bruno Le Maire announced the introduction of GAFA tax: Named after Google, Apple, Facebook, Amazon  on large technology and internet companies in France from 1 January 2019.
  • This is all based on the perception that the digital economy is not contributing it’s “ fair share” of tax revenues.

 Basics

  • Existing tax norms that are framed envisaging brick and mortar business models are not suitable to regulate online services.
  • What distinguishes technology companies from traditional businesses is user participation in creating value, which, in turn, translates into revenue.
  • Although using consumer data to improve businesses is not an exclusive  thing for  the digital economy, the unique ability of digital businesses lies in their power to analyse big data collected via constant user interaction and data mining.

 Why GAFA Tax Is Needed?

 

  • The above chart shows the decrease in revenue collection in the European Union.
  • Lower tax rates paid by US tech giants in Europe have repeatedly caused anger among voters in many European countries, but the 28-member bloc is divided on how to tackle the issue.
  • Ireland, which hosts the European headquarters of several US tech giants, leads a small group of otherwise mostly Nordic countries that argue a new tax could lead to reprisals against European companies and stoke anger in the US.
  • Any tax changes must be approved unanimously by member states.
  • France’s move to introduce the tax on January 1 could be driven by domestic budget concerns, with the finance ministry looking for new sources of revenues and savings.
  • Under political pressure from “yellow vest” protesters, President Emmanuel Macron announced a series of measures last week for low-income families which has left a multi-billion euro hole in the 2019 budget.
  • Some other EU member states such as Britain, Spain and Italy are also working on national versions of a digital tax, with Singapore and India are also planning their own schemes.
  • The yellow vests movement or yellow jackets movement is a populist,grassroots political movement for economic justice.
  • The movement is motivated by rising fuel prices, high cost of living, and claims that a disproportionate burden of the government’s tax reforms was falling on the working and middle class.

 Present Scenario(India’s Case)

  • The Finance Act, 2016, accommodated a 6% equalisation levy (EL) in lieu of specified digital services provided to residents in India. However, EL can only be imposed on advertising services.
  • The Finance Act, 2018, the Income Tax Act was amended to expand the meaning of business connection to “significant economic presence”, which includes digital services.
  • As a result, any income attributable to significant economic presence is taxable in India.
  • However, it is not clear whether the assessment of attributability is based on value creation per se.
  • As the basis of attributability to Indian services/activities is not clear, this can raise a serious problem at the time of assessing income tax.
  • For instance, Uber use data of users as inputs to develop their surge pricing algorithm. This algorithm enables these companies to assess the maximum fare a user would be willing to pay based on passenger demand.
  • Entities are not taxed in the source country for the revenue generated with the help of this created value.

 Challenges

  • The OECD( Organisation for Economic Co-operation and Development) has been unable to devise a definite method of assessing the value that users generate a source country.
  • Due to this anomaly, the GAFA tax and other proposals floated in the EU, UK and France impose an approximate digital tax of 3% on the revenue generated by entities that operate in the digital economy above a certain threshold.
  • This resulted mostly from the slow ongoing process of quantifying user contribution and political pressure to resist further delay of taxing these entities.
  • The lack of consensus is exacerbated due to a difference in the interests of developed (residence) countries and developing (source) countries.
  • For example, countries like France have suggested imposing such an interim tax only on high profit big-tech businesses like Google and Amazon, making net valuation the metric for determining threshold.
  • It creates greater friction between the government of the source country and where the entity is established and thereby undermine the efficacy of double taxation agreements.
  • It is imperative, therefore, that policymakers deliberate upon the possibility and feasibility of adopting a methodology to assess value creation objectively to tax digital players more effectively in the source country.

Way Forward

  • Countries like France have suggested imposing such an interim tax only on high profit big-tech businesses like Google and Amazon.
  • It is imperative, therefore, that policymakers deliberate upon the possibility and feasibility of adopting a methodology to assess value creation objectively to tax digital players more effectively in the source country

 Mains Question

What do you understand by Gafa Tax? Explain the framework the rational behind devising a separate framework to tax online service providers? Explain how such services are taxed in India and issues arising out of it?