With Biden as President, will the global digital tax impasse come to an end?

Profile picture for user ddpreez By Derek du Preez February 10, 2021 Audio mode
Summary:
The OECD is hoping to reach a global solution on the challenge of taxing digital services, which mostly affects US companies.

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With Donald Trump no longer occupying the White House, there is hope that the US will be taking a less combative approach to global trade issues and that President Biden will take a more collaborative, conciliatory stance. High on the agenda in 2021 is the ongoing fight over how countries fairly tax digital services, which in reality mostly impacts the US tech giants.

And time is of the essence, as the OECD aims to reach an agreement by this Summer, before more countries begin taking a nationalistic approach to the issue. The likes of the UK, France and Spain have all either signalled or already implemented their own digital services tax plans - and plan to persist with them if an internationally agreed solution is not found. 

To complicate matters further, the European Union has signalled that it will continue to look at its own approach to digital tax for the trading bloc, even if an OECD agreement on the issue is made. The implication being that the OECD measures may not go far enough. 

The determination to bring in additional tax revenues at an individual country level from technology firms is likely to only be fuelled further by the hit to economies during the COVID-19 pandemic. 

Even though estimates suggest that the potential funds raised will be minimal compared to the scale of public financing used during the health emergency, the general public will likely look even more harshly on the digital economy not paying its way as physical outlets and the high street continues to suffer. 

At the heart of this issue is one of ‘fairness' in an increasingly complex economic environment - how exactly do you tax a social network or search engine, for example? The perception is that traditional businesses are paying their fair share of taxes, whilst modern digital firms are using age-old tax system loopholes to pay the bare minimum. 

Whether that's accurate or not, doesn't really matter. Governments are under intense scrutiny and pressure to do something, particularly as physical businesses have suffered during ongoing lockdowns, and digital businesses have continued to thrive.

What next? 

With this background in mind, tech trade bodies have this week written a letter to the finance departments of the EU's Member States, the European Commission, the UK Government and the US Treasury calling for a new impetus at the OECD on digital tax. 

Penned by Allied for Startups, City of London Corporation, Computer and Communications Industry Association, Developers Alliance and techUK, the letter states that to ensure the best possible recovery from COVID-19, predictable and stable rules around taxation are needed. 

The groups argue that a new US administration and renewed focus on US and European cooperation provides an opportunity to get this resolved at a global level. The letter reads:

In 2020 the international community made substantial progress towards reaching a consensus- based term solution to the tax challenges arising from the digitalisation of the global economy. 

However, if we are to succeed in making progress at the OECD and unlocking a political agreement in 2021 a renewed effort will be needed from the international community.

As the hosts of some of the world's largest digital sectors, the US, EU and the UK are well placed to make a renewed effort to drive these discussions to a conclusion. This is vitally important as the proliferation of national digital taxes threatens to spark trade disputes that could undermine our collective efforts to recover from the COVID-19 crisis, as well as threatening a renewed atmosphere of partnership.

By driving forward the establishment of a common framework the US, EU and UK can not only resolve one of the great economic quagmires of our time but also support a renewal of multilateralism and its ability to tackle the great global challenges.

The trade bodies urge the US, EU and UK to use the G7 in the UK and multilateral engagement at the OECD to find a new impetus in order to reach a resolution on international taxation in 2021.

The general mood amongst officials seems to be one of optimism, with the Biden administration seemingly keen to reverse Trump's track record on the international stage. 

The US has so far made positive noises, with the US Treasury Secretary Janet Yellen last month telling French Finance Minister Bruno Le Marie that she would "re-engage actively" in OECD international tax discussions to come to a timely agreement. 

However, US lawmakers remain pretty determined in their opposition to other countries taxing US technology companies - with claims of such tax systems being "discriminatory". 

My take

An internationally agreed approach to this issue would obviously be preferable. Fragmentation and increased complexity would likely stifle economic growth somewhat. Whilst the US is reluctant, there is intense international agreement that changes need to be made. The current ageing tax systems weren't built for the global, digital nature of our economies. And regardless of what money will be brought in, the perception of fairness is an important one to encourage innovation and competition. I wouldn't have been too optimistic if Trump had won the recent election, but perhaps an agreement can be reached this year with Biden looking to ease international relations during his tenure.