G20 says 'something must be done' on tax in the digital economy...but not just yet, eh?

Profile picture for user slauchlan By Stuart Lauchlan July 22, 2018
Summary:
The EU (mostly) wants change; the US sees it as anti-American; the G20 just wants to kick it down the path - global rules for digital economy taxation.

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(More) trouble ahead

G20 finance leaders have publicly backed the cause of global rules on taxation to account for the rise of the digital economy.

But in reality, any practical commitment has been pushed down the tracks and falls short of the ambitions of the European Union (EU) on the subject.

G20 ministers met over the weekend in Argentina on a wide-ranging number of topics, but one discussion point pushed particularly by the Europeans in attendance was the need for global consensus around how to tax the likes of Amazon, Facebook and other leaders in the digital economy.

Providing no details at all on how to achieve that goal, at the end of the gathering the final communique pitched the bland generalization that:

We support a globally fair, sustainable and modern international tax system...We remain committed to work together to seek a consensus-based solution to address the impacts of the digitalisation of the economy on the international tax system by 2020, with an update in 2019.

Following the tense G7 meeting earlier this month, which saw the US in direct conflict with the other six member states, such an essentially meaningless pronouncement is indicative of the split between the wider G20 on the topic of digital taxation.

The EU finance ministers had made their intent clear a couple of weeks ago in a draft mandate that called for "ambitious, effective and workable global solutions to be agreed by 2020 at the latest." But they went further and claimed that “many countries are interesting in temporary measures’ in the interim.

Interim thinking

The European Commission put meat on those bones earlier this year when it proposed two directives that relate to the taxation of the digital economy - Proposal for a Council Directive – laying down the rules relating to the corporate taxation of a significant digital presence and Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services.

The first of these is the more wide-reaching, proposing that larger digital companies should be taxed across countries where they do business, not just where they’re headquartered. This would apply where a vendor has revenues of €7 million or more than 100,000 users in the country in question of over 3,000 contracts for digital services with businesses in the member state.

(That’s a basic idea that the US Supreme Court may have provided some support for in its recent ruling that allows individual US states to collect sales tax from transactions, even if there’s no physical presence by the vendor within the state boundaries.)

The second proposed directive applies to large companies with worldwide revenue of at least €750 million and revenue within the EU of at least €50 million and would see such firms revenues taxed at a rate of 3%. At present, firms are taxed on the their profits and as such can end up paying little or no tax if their accountants ensure they report losses in individual countries.

That second proposal hasn’t met with universal favor within Europe. Ireland, in particular, isn’t keen on the idea, benefitting from a lot of digital inward investment at present.

The other problem is that the proposal is read as an anti-American proposal as most of the vendors likely to be impacted are US-headquartered. The fear amongst critics of the proposed Directive is that it would provide an excuse to open up another front on President Trump’s trade war with the EU.

Hubert Fuchs, European Council representative to the G20, admitted to reporters at the G20 meeting:

One of the big challenges is that taxation of the digital economy is mostly of course a taxation of American companies - because they are the key players in the world - so the United States feel that this is an attack concerning their digital economy, which it isn't really.

Maybe yes, maybe no, but given the current tensions between the White House and Trump’s annointed “foe” of the EU, offense is clearly quite likely to be taken. US Treasury Secretary Steven Mnuchin said in a statement earlier this year that he "firmly opposes proposals by any country to single out digital companies," adding that those companies were key contributors to the U.S economy.

Trump himself has, of course, been more outspoken. Lost among all the other barbs and slights reported from the recent G7 meeting were his comments on the EU's anti-trust Commissioner Margrethe Vestager, who was dubbed:

Your tax lady... she really hates the US.

As Vestager is the driving force behind last week’s decision to fine Google $5 billion, a decision met by a triumphant tweet from Trump of ‘I told you!”, we can safely assume that this is an Oval Office view that won’t be changing any time soon…

But it’s not just the Americans who aren’t keen. Australia’s Treasury Minister Scott Morrison isn’t a fan of talk of temporary solutions:

We're not convinced at this point about the efficacy of those interim measures - which is basically a sales tax on digital advertising. It is more important to focus on those technical issues rather than the pot-of-gold approach, which is how much revenue can be raised.

On the other hand, Austria is now increasingly the most vocal advocate of ‘action now’ with Finance Minister Hartwig Löger last month telling the Financial Times:

When we see . . . some actors who nearly pay nothing on a European or national basis, even when they are getting large turnover out of each country, it’s not OK. I don't think it’s the right approach to say that we wait until there is a solution on a global basis.

Why his comments particularly matter is that Austria has just taken over the rotating six month Presidency of the European Council and as such is in a more powerful position to influence debate around any EC taxation proposals.

Somewhere in the middle of the debate is Brexit-facing Britain, where Chancellor Philip Hammond at the end of June indicated his belief that “Progress is being made with a way to tax digital business”. He stated:

I have been clear that we need to find a better way of taxing the digital economy, and we are making progress on this issue. At Autumn Budget 2017 we published a position paper on corporate tax and the digital economy, with a further update at Spring Statement. Those set out the government’s view that international corporate tax principles need updating for the digital age to ensure they reflect the new ways businesses create value.

Once again, that’s a pretty empty ‘something must be done, but actually we don’t have a clue what that something it’ declaration. Perhaps that’s inevitable when the UK is still trying to bang out some kind of post-Brexit trade deal with Brussels, with digital elements a major factor, but it’s also pretty reflective of the overall mindset at the G20 this weekend.

My take

This is indeed a case of ‘something must be done’ and the best ‘something’ would be done on a global scale. The chances of that happening are negligible.

Even if  it wasn’t the case that across any large international body, member states will smile for the photo call, but fight like a bag of cats behind the scenes, we’ve now got to factor in Trumpian isolationism and self-interest.

And that’s before acknowledging the reality that there are all too many in Brussels who do see taxation changes as a way to give US firms a good kicking.

Tax reform in the digital economy is something that has be dealt with at some point, but I’m not holding my breath for anything meaningful emerging by 2020.