GAFA tax

The United States has reportedly pulled out of talks aimed at overhauling the global tax system for digital giants.

With this, France has now confirmed an “impasse” on the so-called GAFA tax.

 What’s the concern now?

France as well as U.K., Spain, Italy and others have imposed taxes on the largest digital firms.

U.S. officials have slammed the moves as discriminating against American firms, and say any new levies should come only as part of a broader overhaul of international tax rules.

Now, the US withdrawal from talks risks reigniting a transatlantic trade spat.

Background:

In January, 137 countries agreed to negotiate a deal on how to tax tech multinationals by 2020-end, under the auspices of the OECD.

France, Britain, Italy and Spain have already sent a reply expressing their desire to agree on “a fair digital tax at the level of the OECD as quickly as possible.

What is GAFA tax?

GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large technology and internet companies. France has decided to introduce the tax (3% tax on revenues from digital activities).

The rationale for having separate taxation on digital firms:

Existing tax norms that are framed envisaging brick and mortar business models are not suitable to regulate online services.

The technology companies differ from traditional businesses as a result of user participation in creating value, which, in turn, translates into revenue.

The often complex corporate structures set up by several companies that derive huge revenues from major European economies but allow them slash their tax bills by shifting profits to low-tax jurisdictions. (Base Erosion and Profit Sharing issue)

European countries in particular say the so-called GAFA — Google, Apple, Facebook and Amazon — are unfairly exploiting tax rules that let them declare profits in low-tax havens, depriving them of a fair share of their fiscal payments.

Digital tax in India:

India has the second-largest online users in the world, with over 560 million internet users, and hence, from the viewpoint of its tax revenue base, digital businesses could not be overlooked. However, as is the case in other jurisdictions, Indian tax laws were suited for conventional business models such as brick and mortar stores and thus in dire need of an overhaul.