A multilateral global solution to the vexed issue of Digital Services Tax (DST) is the only workable option, not unilateral national initiatives that add burden to businesses operating internationally.
That was the bottom line conclusion from a panel of experts at the World Economic Forum Global Technology Governance Summit this week, where the question of taxing digital was debated, with one of the prime ‘unilateralists’ sitting in on the discussion and defiantly declaring that ‘Je ne regrette rien!’.
The French Government led efforts to herd European Union member states into signing off on a bloc-wide DST two years ago, but the push failed as other countries flinched before the threat of retaliation from the US - which read the moves as an attack on its tech sector - as well as generally pushing back on being hectored into action by the Macron administration’s increasingly strident demands on the subject.
As a result, France went ahead with the introduction of its own DTS, based on a percentage of local revenue - not profit - earned by large digital services providers, sparking Twitter fury and threats of a wine war from Donald Trump, who solemnly informed the world that:
If anyone is going to take advantage of American companies, it's going to be us!
Trump is gone and the new Biden administration has shown willingness to co-operate on a multilateral solution via the auspices of the Organization for Economic Co-operation and Development (OECD). But the anger at what’s seen as European unilateral efforts to grab money from US firms hasn’t gone away - as the UK, desperate for a post-Brexit trade deal with America - has just found following its decision to go down the unilateral DST route.
For its part, France declares it has no regrets about plowing its own course, as Cédric O, Minister of State for the Digital Transition and Electronic Communication, makes clear:
Obviously, since we're talking about something that is basically International, the solution should be multilateral. We need to find a multilateral solution. This is why we have been backing, for many years now, a solution first at the OECD level, if not at the European level. But what we cannot condone is the fact that there is a huge democratic pressure on those questions of sharing the value on taxation, which is why some countries in the meantime, until we are able to find a solution at the international level, have just decided to take the initiative.
So, the electorate of France demands action, he says, and action now! Vive la République! But those same citizens are currently grumbling about higher prices from the likes of Google and Amazon, which are among the digital providers to have, entirely predictably, passed the additional tax bill on to their local customers. That just riles up O and his colleagues to further threats of retaliatory action that are unlikely to sit well in Washington:
That decision from those companies might be dual-sided because that could bring a lot of evidence, if there is no churn within their customers, that they have a market power that is justifying all the initiatives that are being taken as far as anti-trust is concerned. I don't know any normally-working markets where a company could raise its fee without having a churn within its customers, because of the fact that there is competition. There is a lot of anti-trust discussion those days and if those companies are able to raise their prices unilaterally without having any impact on the customer base, that would mean to some extent...that they have a footprint which puts them in an oligopolistic position or in a monopolistic position. That is justifying initiatives that are especially taken at the level of the European Union.
In other words, the message to US Big Tech is - you want a fight? The EU will give you one!
Zooming in on problems
Striking a more conciliatory note, Josh Kallmer, Head of Global Public Policy and Government Relations at Zoom, made the point that all parties need to acknowledge that the world has changed “unimaginably” over the past 20 years and that the traditional tax regime no longer fits:
The extent to which services are being provided digitally across borders is remarkable and it is absolutely the case that the notion of permanent establishment, the notion of a physical place of business being the anchor for allocating taxing rights, has lost some of its utility. It's still an important concept, it's still an important fixture in the set of international tax norms, but I think that there's certainly an appreciation within Zoom - and I think across the global tech sector as a whole - that digitization has legitimately changed the playing field and governments have legitimate questions about how to respond.
But unilateral action isn’t the way to go, he added, and throws up fresh problems:
The first is the prospect of double or multiple taxation. If you don't have clear rules of the road agreed among countries that are essentially battling over the same quantity of revenue or profits, you have the very real prospect of that happening.
Some of the DSTs out there don't have a minimum revenue threshold, so you have small companies, many of which won't make a profit for many years, who potentially would be within the scope [of the tax] and be taxed on revenue that is not part of an overall profit-making effort. So to the extent we want to incentivize small innovative companies entering the scene all over the world, then we have a potential penalty there.
A third point is administrability. It is no small feat, even for a relatively large company, let alone the largest ones, to re-position and re-engineer their internal processes and their financial reporting approaches and everything they need to do to comply with greatly varying rules from market to market. There's a deadweight loss there that occurs.
That last point was one picked up by Barbara Angus, Global Tax Policy Leader, EY, and previously Chief Tax Counsel on the US Congress’ House Ways and Means Committee:
Some of the Digital Services Taxes that have been enacted were enacted with a sort of a natural sunset or a phase out or were linked to the work of the [OECD] Inclusive Framework. From the outset, they had this intention that they would disappear when there was a co-ordinated solution. That's not true of all of the Digital Services Taxes. The complexity that's involved in preparing for and complying with these taxes and managing them all around the world is huge and it's not [made] less by knowing that the tax may only be temporary. There's also a concern that when you put a tax in place as a sort of a temporary measure to be replaced by something that's still being developed, once that is developed, will the original measure be eliminated? That is a natural worry.
What is digital anyway?
Angus also raised a concern about the meaning and scope of the term ‘digital’, citing “a really difficult definitional issue” that needs to be addressed:
What is meant by digital activity? Certainly we know some digital activity, but every day all businesses are getting more and more digital. Most commodity-like business today has a growing aspect that could be viewed as being digital. It's just the nature of the globalization and digitalization of the economy. That creates challenges in trying to do something that is that is narrower.
This ‘everyone is digital’ argument is one that needs to be tackled, agreed Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC), but she wants the debate to get back to first principles:
Should a company pay tax where it's actually earning money? Yes! Should it be that everybody pays a fair share? Yes! We've seen decades of tax lawyers, company lobbyists [in action]. Look at the illicit flows on commodity and product markets out of developing countries. This can't go on, because we'll never build trust in a world that is governed by sensible multilateral rules if we don't actually include everybody. I hear the arguments about revenue versus profit, but I have to tell you I'm a skeptic, because I've seen companies manipulate profits. They'll move them around until they're making profits into no profits in low tax environments. Well, that's got to end. If we're going to have decent companies, and there are many out there, having a fair competition floor, then let's get it right.
And a good place to start, she declared, is with an agreed base corporate tax, something that the Biden camp is currently promoting hard as an idea:
Let's get the rate agreed and let's get it done. Then agree on a framework, but not an exclusive framework that lets companies fall through the cracks, that narrowly taxes digital services, that doesn't include the explosion of online capacity that small content companies don't have so they are forced to use larger companies services, making them unprofitable or uncompetitive themselves. Let's get a shell of principles agreed on a very fast timeline and let's get it right!
The OECD is currently looking to get its first cut of a global solution ready this summer, although (a) that’s a very ambitious timeframe and (b) that’s what it said two years ago! But it’s in everybody’s interests to get something on the able, argued Burrow - citizens, governments and, yes, the tech sector:
I ask you to look at the history. Corporations have taken more and more of Treasury pies in every country, for what is actually investment in their own business model, to the point where the trust is broken in most countries. And trust in the big tech companies is particularly broken because of the explosion of profit versus the taxation they're paying.
Despite the reborn willingness from the Americans to play ball with the rest of the world on topics such as tax, I remain skeptical that the OECD timeframe will be met with something practical that can be acted upon. As with all such multilateral initiatives - from global tax through to tech sector standards bodies - everyone will say the right thing when we're still at the theoretical stage, then fight like a bag of cats when there’s any threat of them actually having to be put into practice.
So the UK’s Chancellor of the Exchequer Rishi Sunak, for example, can issue positive soundbites in support of Biden’s global corporate tax standardization now, but at the same time one of Brexit Britain’s ambitions was to create a Singapore-style tax regime to lure inward investment from big business. The two are not compatible. And will France and Germany really saddle the EU with a US-led base tax rate? And that's before we got onto how non-allied nations will respond...
A final point from Zoom’s Kallmer raises an important wider consideration, one based on his experience in a former life working for the the Office of the US Trade Representative - this international debate may be about tax, but the way it’s conducted - and potentially resolved - says a lot about how willing countries are to ‘play nicely’ to tackle worldwide concerns:
When individual markets depart from a multilateral approach, it affects the larger global environment as well. It affects trade policy. It's reasonable to expect that it would affect things like how we fight climate change, how we truly share problems that we need to be working together to address.
We’re still reeling from a global pandemic, one that has thrown up some unpleasant - and frankly frightening - evidence of Vaccine Nationalism on the part of certain countries and blocs that preach higher standards to the world. If COVID hasn’t taught us the importance of multilateralism, there really is no hope for us.