India’s Equalisation Levy, US Trade Act and Tax Avoidance Arrangements : An interplay

The US Trade Representative has initiated an investigation into potential tariff and non-tariff barriers arising out of Equalisation Levy imposed by India that is purported to affect “US Exports”.

Equalisation Levy (popularly dubbed “Google Tax”) is imposed by India on Advertising and eCommerce companies not having a Permanent Establishment in India and thus avoiding Income Taxes in India all together.

The Section 301 of the US Trade Act, 1974 is one of the principal statutory means by which the United States enforces U.S. rights under trade agreements and addresses “unfair” foreign barriers to U.S. exports.

In this matter, the factual matrix is that many USA Companies use various Tax Avoidance Techniques such as the Double Irish Dutch Sandwich to avoid corporate taxation on non-US profits. In this scenario, the Advertising and eCommerce Service on which Equalisation Levy is levied is being rendered through the tax jurisdiction of Ireland. Effectively, as far as these transactions are concerned, the Equalisation Levy is being levied on payments being made from India for Irish export of services to Irish resident companies (which ironically also happen to be subsidiaries of US Corporations) and who would also claim the benefits of India – Ireland Double Tax Avoidance Agreement.

My contention is Can a US Multinational Company claim Export revenue of its Irish subsidiary as “US Exports” to be entitled to the benefits of US Trade Act, 1974? Yes, this a technicality but this same technicality saves US Corporations billions of dollars in Taxes. Corporations must be required to adapt to both the benefits and consequences of their Tax Avoidance arrangements.

The use of Tax Havens as a Tax Avoidance tool is widely debated. A point crucially being missed is the impact of such Tax Avoidance arrangements on Bilateral Trade / Current Account Deficits & Capital Account Surpluses and subsequent Diplomatic Negotiations on Trade & Tarriffs and Investments. Take the instant case where the exports are accounted for as Irish Exports in Trade Statistics. While USA under President Trump regularly critiques foreign leaders and their trade policies for US Trade Deficits under what US claims are unfairly negotiated Trade Treaties, the impact of US Corporations & others using Tax Avoidance tools to stash profits in Tax Havens leading to a statistical reduction in US Exports and also US Trade Deficit certainly calls for introspection, debate and appropriate factoring in Trade Negotiations.

An ethical question more concerning the US taxpayers is whether the US Trade Representative funded by the US Taxpayer resources must be expended for protecting the interests of a US MNC avoiding US Taxes in matters / arrangements which are being used to avoid such Taxes.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s