Taxing the ‘Un’Taxed Digital Economy with a Focus on India: Decoding the Outsourced Holding Company Model

Abstract

In the backdrop of the digital revolution we are witnessing, value creation through conventional production of goods and services is being challenged every now and then. These days, the digital economy, from entertainment to shopping, forms a crucial part of millions and millions, but its value added is slipping through our grasp. The fact of the matter is that sizeable shares of the value additions these companies do are moved out of countries where corporate tax rates are high to the accounts of companies in tax havens. This means that the productivity gains achieved through the digital economy does not necessarily translate into increased tax revenues for the government. The big names in the digital business market, at present, have been accused of paying virtually no tax in those populous countries where they operate. For example, Google’s revenue reached about US$74.5 billion in 2016 and yet Google is known to be subject to low effective rates of taxation and even accused of deferring taxes on revenues over US$24 billion only in the United States. Other European countries like Italy, France and others have proposed to tax the income of these digital entities but somehow it never materialized. At the outset, the paper presents a theoretical model to show how that liberal tax laws have always been attractive for shifting profits. In this background, the paper discusses the outsourced holding company model of tax avoidance used by digital business platforms like Flipkart with a special focus on India and hence decoding the tax design that can be operationalized by the fiscal authority to ensure increased tax revenues from digital value creation under such a case.