Milan Shah, Director-Direct Tax and Regulatory Services, PwC India
Digital content is accounting for an increasing share of growth in global entertainment and media revenues. As broadband coverage improves and connections become more reliable, the online video consumption has been growing tremendously over a short span of time, especially among younger audiences. With an expected CAGR of over 24 percent in India for the period 2015-2020, the online video consumption has paved way for the advent and emergence of multichannel networks (MCNs).
The advent of MCNs has attracted considerable M&A attention from larger international media companies looking to expand their participation in digital video, and more deals can be expected. Video advertising spending is starting to shift from TV to digital. Since the business models of MCNs are not yet established, they present real challenges to media companies when it comes to their integration and evolution toward long-term sustainability and value creation. These new business models have also created new tax challenges in terms of ambiguities in taxation of revenues and income arising from the digital economy in which MCNs operate, a situation which has been noted as an area of concern globally.
The spread of digital economy in which MCNs operate poses challenges for domestic and international taxation. International tax issues have never been as high on the political agenda as they are today. The integration of global economies and markets has been putting a strain on the tax rules, with apprehensions that the weaknesses in the current rules are resulting in Base Erosion and Profit Shifting (BEPS). In response to this concern, and at the request of the G20, the Organization for Economic Cooperation and Development (OECD) published, inter alia, an Action Plan on Base Erosion and Profit Shifting (BEPS). Action 1 of the BEPS calls for work to address the tax challenges of the digital economy.
As a follow up on BEPS Action 1, the Indian Budget 2016 has introduced a new 6 percent equalization levy on a non-resident, on the consideration for online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the central government. The provisions cover online advertisement revenue of MCNs with websites outside India or MCNs making payments to non-residents providing services/facilities in relation to their online advertisements. The responsibility for complying with the equalization levy provisions is on the payer and any default in withholding and depositing equalization levy will entail disallowance of expenses and related penal consequences. Thus, MCNs will need to consider implication of equalization levy cost in their overall business models, especially where the MCNs have their websites outside India earning advertising revenues from India.
Also, developments on GST implementation, which is expected to subsume a number of indirect taxes presently impacting MCNs or litigations on withholding tax application on variety of arrangements, can significantly impact the tax cost of MCNs and, therefore, the cost of operation in India.
Some key tax-related aspects which should be kept in perspective by the MCNs include:
Is 6 percent equalization levy applicable? Do we know the impact it would have on the business we undertake?
Are we compliant with all the applicable laws including withholding tax laws and Foreign Direct Investments Regulations? As the MCN segment matures, the regulatory environment is also evolving to address the intricacies of the segment. Businesses need to implement a compliance framework to keep abreast with the same.
Provision of digital services/products has always been a matter of debate for levy of service tax and VAT. Businesses need to address this issue as indirect taxes may cast a substantial burden on the margins, if not factored appropriately.
Are we ready for the revolutionary change in indirect tax regime with introduction of GST? Introduction of GST is expected to result into revolutionary changes not only in tax administration but also the way business is undertaken and, therefore, GST preparedness is imperative.
Considering that the direct/indirect taxes can significantly impact margins of an MCN, it needs to align its business model in India to ensure that it is tax-efficient and at the same time tax-compliant.