Digital Taxes - An Unavoidable Measure?
In an age of digitalisation, technology multinationals aren’t paying fair taxes. In fact, companies such as Apple and Amazon consistently avoid European taxes. Alarm bells were ringing when it was found that Amazon paid just $2.2m in corporation tax in the UK despite having $11.4bn in revenue in 2018. Now more than ever, these technology-based firms have been the winners, which means that many people are eager to see them contribute their fair share.
To counter multinationals’ tax avoidance, countries are bringing in a ‘Digital Tax’. This means big technology companies are taxed a percentage of their revenue. France has recently started collecting its new digital tax, and it’s faced a lot of pushback from the USA and digital companies. Austria, Hungary and India already have a digital tax, while Canada has announced one.
So what will be the future of the digital tax? It’s important to recognise that we’re very close to worldwide consensus that technology multinationals aren’t paying fair taxes. Thus, the OECD has been coordinating negotiations between 137 countries on implementing a global Digital Tax.
But there’s one big reason why it hasn’t gotten very far: the USA. Most of the companies who would face the Digital Tax are American companies, so they’ve been procrastinating in these negotiations. It was America’s reluctance to proceed with the global tax that led France to implement a unilateral tax. So essentially, these unilaterally-imposed taxes are stopgap measures until total consensus is reached. The countries view it as a strategy (or more cynically, a threat) to bring America to the negotiating table.
There’s one big problem that confronts us straight away. All these countries are bringing in their own digital taxes, at different tax rates and different definitions of which companies fall under the Digital Tax. Austria, for example, is just taxing online advertising revenues, whereas India is taxing entire online platforms and their facilitators. The tax rates vary as well, ranging from 2% in the UK to 7.5% in Turkey. Due to this, companies will likely face double taxation (where tax is paid twice on the same income).
This causes confusion, both for companies who operate across the world and for the countries negotiating the OECD-backed Digital Tax. The varying definitions of digital taxes across these unilateral measures has led to three competing proposals given to the OECD, as to which elements of digital companies should be taxed. India’s digital tax forms part of a ‘significant economic presence’ proposal, which would tax a much wider part of the online market than the other two proposals. In contrast, the “user participation” proposal only taxes revenue derived from user engagement with online platforms. The OECD has acknowledged that these political differences have slowed negotiations. Its original target was to implement a solution by 2020, but this has been pushed back to only ‘working towards an agreement by mid-2021’.
But even though negotiations have been hampered by differing unilateral taxes, they’ll still be key in forcing the USA to buy into negotiations. The current unilateral system means American companies will face double taxation and pay different tax rates across the world, which will raise their administrative costs as well as leading to greater tax liabilities. Therefore, it’d only be in American interests to find a global solution, which would ease these pressures on American businesses. Essentially, the world has no choice but to implement unilateral taxes in order to force American cooperation.
Until the worldwide tax is established, there’s a destabilising effect that unilateral ones have on OECD negotiations: dealing with trade wars. Countries imposing a digital tax often face anger from the USA which, under Donald Trump, meant trade tariffs. America has responded to the French digital tax by announcing a new round of tariffs on France, which has drawn out the USA-EU trade war. Even President-elect Biden may be reluctant to pursue the digital tax, given his extensive connections with Silicon Valley. Donors to the 2020 Democratic campaign included Reid Hoffman (Microsoft board member and LinkedIn co-founder) and Brad Smith (President of Microsoft) for example. Indeed, it’s been noted that Silicon Valley has shown a strong preference to Biden in the recent election. With populism holding immense power across the world, politicians will be eager to use digital taxes as an extension of anti-globalisation and anti-American rhetoric; it could quickly become a new, popular form of protectionism. Thus, it’s crucial that countries quickly establish which parts of online businesses are taxable, and at which tax rate they should do this. Otherwise, we risk a perpetuation of trade wars at a time when the fragile global economy really doesn’t need them. The OECD has warned that failing to reach an agreement could lead to trade wars that would wipe over 1% from global GDP annually. Thus, Biden has to prioritise creating an effective global solution rather than his Silicon Valley connections.
So are these unilaterally-imposed digital taxes justified? On balance, I’d say they are; economies are struggling now, technology multinationals are profiting, America has been slow to accept the need for a digital tax. If the USA acts constructively in negotiations, a global decision will be easier to reach.So even though it’s clear that we need to move on from these unilateral digital taxes quickly, they mark an important step in creating a quicker global solution, while creating a temporary solution for countries struggling economically.