Why digital taxes are the new trade war flashpoint - TechCentral

Why digital taxes are the new trade war flashpoint

Big Internet companies have long been the target of complaints that they don’t pay enough in taxes. Fed up, more countries are rolling out plans to hit the likes of Facebook and Google with a “digital tax” — a levy on their revenue earned in cyberspace. It’s a way for cash-strapped governments to tap deep-pocketed companies whose multinational earnings often escape the taxman’s grip. The US says digital taxes unfairly discriminate against American firms and has threatened retaliatory tariffs, potentially opening another front in the trade war.

1. How does a digital tax work?

The idea is to shift taxation to the places where users of online services are located, rather than the usual approach of focusing where companies base their regional headquarters or book their earnings. Targeting revenue rather than profit gets around techniques used to push earnings into lower-tax jurisdictions. In July 2019, France became the first country to impose a digital tax after wider efforts by the European Union to develop a harmonised approach failed. Its 3% levy applies to companies with at least €750-million in global revenue and digital sales of €25-million in France. Of about 30 businesses affected, most are American, but the list also includes Chinese, German, British and even French firms.

2. Who’s in this battle?

In January, the US and France came close to triggering a transatlantic trade war as the EU said it could retaliate if the US went ahead with planned tariffs on roughly US$2.4-billion in signature French products, including wine, cheese, handbags and makeup. The two countries agreed on a truce whereby the US would back off from tariffs and France would delay collection of its digital tax to the end of 2020 to allow for renewed efforts to reach a multilateral solution. Since then, the US has launched investigations into the digital taxes proposed or enacted by 10 nations and the EU, citing section 301 of the US Trade Act of 1974, which allows it to retaliate for trade practices it deems unfair. It’s the same tool used in the dispute with France and to justify US tariffs on Chinese goods due to alleged theft of intellectual property.

3. Who else is considering a digital tax?

The US Trade Representative says countries that have either adopted or are considering digital taxes include Austria, Brazil, the Czech Republic, France, India, Indonesia, Italy, Spain, Turkey and the UK. The US views India’s tax as particularly pernicious because its reach is much broader than what’s being proposed in Europe. In April, India expanded the scope of its 6% “equalisation levy” — a withholding tax on foreign online advertising platforms — to include digital companies with a “significant economic presence” that engage with or sell to Indians. Known in India as the “Google tax”, the charge deviates from internationally accepted principles because it doesn’t provide credit for tax paid in other countries for the service supplied in India, according to a March report from the USTR.

4. How did the pandemic change this debate?

Governments are increasingly focusing on digital taxes as a way to raise funds to help pandemic-stricken economies, and finance ministers from Indonesia, France and Italy have said the health crisis adds urgency to their plans. Stay-at-home policies have played to the strengths of companies such as Amazon.com and Netflix, along with other platforms that comprise the nearly $26-trillion global e-commerce marketplace. France has said it would drop its tax if the US and other countries agree to a global effort for a uniform approach under the stewardship of the Paris-based Organisation for Economic Cooperation and Development. But the pandemic has challenged the OECD’s ability to forge a comprehensive accord by the end of 2020 as it had hoped.

5. What’s the case for a digital tax?

Because corporations are often domiciled in other countries — including low-tax jurisdictions such as Ireland or Bermuda — and shift money seamlessly across borders, companies that sell online can easily avoid paying taxes in countries where they nevertheless make significant sales. More fundamentally, France argues that the structure of the global economy has shifted to one based on data, rendering 20th-century tax systems archaic. According to 2018 figures from the European Commission, global tech companies pay a 9.5% average tax rate compared with 23.2% for traditional firms.

6. Why tax revenue instead of profit?

The short answer is that it’s simpler to tax revenue. Taxing profits requires establishing where earnings actually accrue, which is hard enough for any global company but even more so in the digital sector; you might book a taxi in London, for instance, but your payment could be settled in Amsterdam. Politicians also argue that taxing revenue may be the best way to squeeze money out of companies such as Amazon that report large sales but paltry earnings. Still, it’s not straightforward to work out which revenue is linked to a specific country. To do that, French tax collectors propose to tax Internet companies proportionally to their “digital presence” in the country relative to the rest of the world.

7. Is tax a new front in the trade war?

Transatlantic tax wars aren’t new. Apple was slapped with a €13-billion bill for back taxes by the European Commission three years ago, which CEO Tim Cook called “political crap”. The US treasury department tried and failed to sway the EU’s Apple investigation, which alleged that the company got an illegal subsidy. The commission has also probed Google’s Irish tax arrangements and ordered Amazon to pay €250-million in back taxes to Luxembourg. Other US companies, including non-technology firms such as Starbucks and Nike, have also been targeted in tax probes. The EU insists that the common thread isn’t that they’re American but that they’ve used complex legal structures and intellectual-property licensing to limit tax payments.

8. How are tech companies responding?

Tax is only part of a bigger EU backlash against big tech. Internet firms have been put on notice over issues ranging from privacy to market dominance — and they’re fighting back with lobbying and court cases. In 2019, Google agreed to pay €965-million to settle two French tax probes. Apple and Amazon are contesting their respective European tax decisions in EU courts, and a legal victory could halt that part of the bloc’s crusade. Lawmakers are on the lookout for companies that might consider changing their tax structures or moving income outside of the EU to stay ahead of the curve.  — Reported by William Horobin and Bryce Baschuk, (c) 2020 Bloomberg LP

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