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Digital companies scramble to save on tax as India tightens data laws

The fear for companies such as Google, Facebook, Netflix, Amazon and LinkedIn is that if the servers sit in India, it would be seen as a PE and will attract higher tax. Some are also exploring another route for tax saving. They may consider creating a separate company that would own servers and the main entity would only pay “rent” for using it.

, ET Bureau|
Dec 12, 2019, 07.37 AM IST
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Tax experts said merely having a server in India does not automatically mean that the company has a PE in India.
MUMBAI: Global digital giants are scrambling to explore and find ways for tax arbitrage to get around India’s personal data protection bill that requires them to have their servers and data in India, said four people close to the development.

The fear for companies such as Google, Facebook, Netflix, Amazon and LinkedIn is that if the servers sit in India, it would be seen as a permanent establishment (PE) and will eventually attract higher tax. PE is a concept in taxation that determines which country has the right to tax a multinational’s income and to what extent.

The underlying principle of the data protection bill suggests that the companies will have to retain data of Indian customers in India.

People with direct knowledge of the matter said these companies are exploring options to reduce their tax outgo. Many could lease the servers from Indian companies to host the data to avoid having PE in India.

However, tax experts said merely having a server in India does not automatically mean that the company has a PE in India.

“The law is clear that such server would be its PE in India if the server is owned by it or is owned by some other entity and is exclusively at the disposal of such a company. If the server is leased by many other companies and no specific space is at the disposal of the company, such a leased server will not create a PE in India and hence there should be no additional impact on taxation in India,” said Daksha Baxi, partner, Cyril Amarchand Mangaldas.

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Some of the companies are also exploring another route for tax saving. They may consider creating a separate company that would own servers and the main entity would only pay “rent” for using it. This would mean that the Indian income tax will only apply to the lease or rent income and not the entire revenue.

But tax experts said that tax laws are never as simple and the taxman will still be in a position to question these structures as the tax is not on severs but on income generated from data.

“They (digital companies) may have their own servers or lease them to store and process data in India. They need to certify to the government the address where it resides. It’s not the servers — whether leased or owned — that create a PE, but the data as the income is from the data and the tax has to be on income earned on such data,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, a financial advisory firm.

Emails sent to Facebook, Google, Amazon and LinkedIn did not elicit any response while streaming giant Netflix refused to comment on the story.

The tax arbitrage could be huge for most digital players, say insiders. Most digital majors only have a small Indian entity that only have “commissions” or similar income. In many cases, domestic income shown under the Indian entity is only about 10% of the total revenue. Indian tax at 35% is only applicable on this portion of the income. The remaining 90% of the income is sent outside India into jurisdictions such as Singapore or Ireland as royalty payments or similar subheads. This income in best case scenario faces about 15% tax depending on the tax treaty India has with the country.

Persons in the know said most companies will have to create these structures as there are several other parallel laws that could increase their domestic taxation. One such is the new Organisation for Economic Co-operation and Development (OECD) guidelines around digital companies and where they must pay the tax. Most digital players could be looking to create these structures and start the tax planning in the next few months, said a person with direct knowledge of the matter.
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