India's Significant Economic Presence Test
We have made a submission, available here, to the consultation by the Indian Government on the definition of a new tax threshold based on significant economic presence. We support this initiative, as revisions are sorely needed to rules now a century old, and we endorse the criteria chosen in India, which rest mainly on transactions producing revenue from India, as well as systematic and continuous solicitation of business or engagement with users in India.
We support India’s initiative in establishing new criteria for taxation of foreign companies based on a ‘significant economic presence’ (SEP). In the digital age, international agreement is clearly needed to reform the rules developed a century ago, including the tax threshold of a ‘permanent establishment’ (PE) which requires a physical presence. India’s lead has now been followed by others, especially the European Union (EU), and this should help persuade reluctant states to accept the need for change.
We also endorse the criteria chosen in India, which rest mainly on transactions producing revenue from India, as well as systematic and continuous solicitation of business or engagement with users in India. The proposals under debate in the EU are similar, but include a test based on the number of concluded contracts, which in our view is impractical and inappropriate. Profits require sales, so revenues should be the main test. Users are also important, but are not directly linked to revenues, and should be regarded as assets.
However, the numerical tests for defining a SEP should not be set so low as to require tax registration for small and medium businesses which may have some customers in many countries around the world. An internationally agreed definition of SEP should leave flexibility for states to agree thresholds bilaterally, based on the size of their economies and cross-border flows. India’s GDP is similar to that of the largest member states in the EU, so we suggest that India’s thresholds for revenue and users could be in line with those proposed for the EU, to ensure some convergence.