India: International Taxation and Cross-Border Digital Services

Cross-border digital services pose a novel challenge to international taxation. Not covered by the traditional definition of ​‘permanent establishment’ (PE), digital services have been sought to be alternatively taxed under various ​‘source-based’ approaches: via Digital Service Taxes (or Equalization Levies), via the Significant Economic Presence (SEP) test, as Service PEs, as Dependent Agent PEs, and as Virtual PEs. Each of these relatively recent approaches has attracted critical attention and, in some cases, international retaliation.

As the lead initial international effort, the OECD’s 2013 Action Plan on Base Erosion and Profit Shifting (BEPS) — based on a proposed reallocation of taxing rights including for digital services (Pillar One) and a global minimum tax of 15% on MNEs over a threshold revenue (Pillar Two) — has progressed to cover: a) an ​‘Action 1: 2015 Report’, b) the ​‘2017 BEPS Multilateral Convention’ (now in force), c) a ​‘2021 Statement on the Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’, and d) the ​‘2023 Multilateral Convention to Implement Amount A of Pillar One’ which is under review (not opened for signature), including by the US which holds greater weight under the convention’s text given the number of ​‘Ultimate Parent Entit[ies]’ of technology companies in its territory.