Investigating the international corporate tax revenue efficiency under the digital economy: multiple case study of MNES operating in India

Abstract

Purpose

The purpose of this paper is to validate the theoretical finding that digital MNEs avoid physical presence norms of permanent establishment and royalty characterization rules for business and royalty taxation, respectively, to escape tax incidence in the market economy, using information, communication and technology features and transfer pricing (TP) manipulations.

Design/methodology/approach

Multiple case studies of MNEs from technology sector, based on judicial decisions in 141 cases, over taxability of profits earned from Indian economic activities. Additional in-depth case study of the Uber Group to study the tax avoidance structures under platform economy, by routing of Indian profits through The Netherlands, a tax haven.

Findings

The study finds a significant number of digital MNEs earning profits from India and avoiding tax by defying physical presence and royalty characterization. In majority of the cases, demand-side business activities are discharged through incorporating and remunerating affiliates at cost plus low markup, thus avoiding tax incidence, using TP manipulations under the arm’s length principle applied by governments for benchmarking the intragroup transactions of the MNEs.

Research limitations/implications

The research findings validate the view that digital features promote tax avoidance in the market economy.

Originality/value

The originality of the study lies in the validation of profit shifting through digital features from the developing market economy and portending that digital MNEs defy physical presence to avoid business taxation through TP manipulations.