India makes another strike for source based taxation

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India is doing a great job for the developing and intermediate states of the world right now with regard to taxation.

In the Vodafone case that it is taking it is arguing that capital gains arise in the place where an asset is actually located, and not in the tax haven that a multinational corporation wants to record ownership of it.

Now it is taking on Microsoft. According to the Economic Times of India:

India has asked US software giant Microsoft to pay 175 million dollars in back taxes and interest for revenue earned from licensing its software here.

An Indian tax authority ruled Wednesday that Microsoft's India subsidiary Gracemac Corporation should have paid tax on the 560 million dollars it showed as revenue for the six financial years up to March 31, 2004.

The dispute revolves around whether the amount qualifies as royalties or sales.

The amount should have been taxed as royalties, the Commissioner of Income Tax ruled in New Delhi, citing language in the end-user license agreement shipped with the company's software.

India taxes royalties at 15 percent, but the tax appeals body appeared to be levying a similar amount in penalties and interest charges.

Microsoft's India subsidiary did not pay taxes on the income, citing a double tax-avoidance treaty between India and the United States and noting that an overseas subsidiary paid tax in the US on profits from the software sales.

I warmly welcome this move. Microsoft has, as is well known, sought to shift all its profits outside the USA to Ireland - including those arising from India. This is unethical. It's also quite contrary to the spirit of tax compliance. This means that tax is not being paid where he economic transactions giving rise to profit occur. India is seeking to change that and to claim profit earned from its economy is taxable in that same economy.

This is source taxation. It is what the developing world needs. To stop aid dependency it is absolutely essential.

And as someone from the World Wildlife Fund said at a conference I was at yesterday - if all the multinational companies in Mozambique paid tax at 20% on their profits in that country they would have no need for aid. But those companies don't pay that tax.

India is trying to change this. Keep going, I say.