1.         Introduction

In this era of digital economy, many companies - particularly in the information technology sector – derive substantial income from foreign jurisdictions (the Source States) without establishing physical presence there. The existing provisions in the contemporary tax treaties are outdated and ill-equipped to bring such income within the ‘tax net’ of the Source States. This is recognized in, and is the subject matter of, the Final Report (“the Report”) of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Item No. 1. The Report considered three potential solutions but it did not recommend any of those measures.

Subsequent to the release of the Report in October 2015, a number of jurisdictions have taken significant initiatives for securing a share of tax revenue from the digital transactions. Particularly, the developments in India, Italy, and Taiwan are noteworthy.

This article begins with examination of the key aspects in the Report vis-à-vis the ‘significant economic presence’ and the ‘equalisation levy’ and, thereafter, focuses on the important developments related to the BEPS Action Item 1.

 

As regards the concept of significant economic presence, this article takes note of the important judicial developments in the United States. (Indeed on several occasions, the various state tax authorities in the United States have invoked the concept of significant economic presence for imposing tax on many out-of-state companies.) The article also covers the recently enacted Italian ‘web tax’ and the very recent proposal for introduction of the significant economic presence provisions in the Indian tax law. Further, it touches upon the issue as to whether the Indian equalisation levy conflicts with Art. 7 (Business profits) of the contemporary tax treaties. And, finally, it highlights the relevant developments in Taiwan.