OECD boss - a first draft at global digital services tax ready for June?

Profile picture for user slauchlan By Stuart Lauchlan January 29, 2019
Summary:
The OECD hopes to have a first draft of global proposals ready for June.

AngelGurriaOECD
Angel Gurria, OECD

There was a lot in Nick Clegg’s debut outing as global ‘Apologist-in-Chief’ for Facebook to make eyebrows raise, but none more so than his comments on the “unbalanced” nature of the company’s tax position:

I think the tax arrangements for Facebook globally and indeed for the digital sector as a whole are unsustainable…The vast bulk of that tax is paid in the United States, not in the United Kingdom or France and Germany. That is the thing that is unbalanced. Of course it’s unbalanced to have an American company, yes that’s where the value is created, catering to the world yet paying the vast majority of tax only in one country, one jurisdiction…That is what needs to change.

‘I agree with Nick’ is a phrase that stems from the Zuckerberg avatar’s earlier career as a UK politician - and one that had some long term consequences! - but on this occasion it is possible to agree with Nick.

But while we look forward to Facebook coughing up more tax in non-US domiciles - hint: don’t hold your breath! - work continues on efforts to produce an effective form of digital economy taxation that is fair and equitable.

As 2018 drew to a close, the French government failed in its blustering bid to bully the other 27 European Union (EU) countries into a 3% turnover tax on digital services firms. Opposition stemmed from countries worried about the US response to such a tax, which would inevitably impact on American firms the most, as well as from nations with let’s call them highly-favorable tax regimes to encourage inward investment from the Facebooks and Amazons, most notably Ireland.

The decision was taken to kick a decision further down the tracks and to look to work being carried out by the Organization for Economic Co-operation and Development (OECD) on a global solution.

That took a step forward last week when the OECD Secretary-General Angel Gurria said he hoped that a first draft proposal would be ready to be presented to G20 finance ministers in June. A consultation document will be published shortly, while a public consultation is due to take place in Paris in March at a meeting of the OECD Task Force on the Digital Economy. If all goes well, Gurria now believes that there might be a global agreement by 2020:

We have a very clear time line, a very clear mandate. We are going to deliver a relatively detailed or…a good compass, a good signalling system and then we will deliver the final report and start implementation in 2020. That is the way the G20 mandated us. We're not lagging behind, this is not late.

I say this is too important to be urgent. So don't trip over yourselves in order not to do it now but if the is a political imperative then of course we respect it, but let's make sure everybody's ready to move forward when there is a deal on the table.

Meanwhile in Europe

But back in Europe, France is still pushing for accelerated action with French Finance Minister Bruno Le Maire stating in a newspaper interview that:

We made a compromise offer to Germany in December and I am convinced that a deal is within arm’s reach between now and the end of March. With the European elections just a few months away, our citizens would find it incomprehensible if we gave up on this.

But there’s no sign of the likes of Ireland being ready to lift its objections. Irish Finance Minister Paschal Donohoe remains unapologetic for his country’s stance on digital services taxation:

What we are very concerned about is any move in international taxation that shifts the tax incidence away from value creation towards consumption. If you're an exporting economy and if you're service exporting economy, that poses a gigantic challenge for us and I have to reserve my right, which I have done, to say I'm sorry, if a change like that will set a precedent that you're an exporting economy, it will be a real challenge for us.

The other grave concern we had is we believe change like this, the safest place to do it is in the OECD because if we don't have the engagement of the US, if we don't have the engagement of Japan, if we don't have the engagement of China, I believe we run a real risk of a tax issue becoming a trade issue.

Donohoe does pledge support for the OECD efforts to produce a global solution and one that acknowledges the complexities involved rather than just being a push to hammer Facebook and Amazon with bigger tax bills:

It would be fair to say at this point I think the key issue we have not yet teased out in the debate is there is an assumption that there is a digital economy here and the rest of the economy over here, whereas in fact what we have is an entire economy that has become digitised. I think we still have to figure that out, so that is why the principle that we have for other elements of corporate taxation we will hold in relation to digital taxation, which is you need to be cognisant of where value is created. My own view is we haven’t made enough progress in that yet. I think where you will see that happen is in the inclusive format work that is now under way in the OECD and we’ll play our part in that.

France’s ambitions have also been undermined by the European Commission pushing back plans to end individual member states veto powers on the subject to 2025, rather than the previous 2020 deadline. EU-wide tax rules require unanimous approval by all 28 countries, so all it takes is for Ireland to hold its line and that’s that.

That impasse has paved the way for individual EU governments to go their own way in the interim. The UK plans a 2% turnover tax from 2020, while the Spanish government has just signed off on 3% turnover tax for companies with revenues of more than 700 million euros globally and at least 3 million euros in Spain.

There’s a problem with this approach though, according to the OECD’s Gurria:

What the French promoted, the Euro directive that should have started on 1 January this year, which didn’t, that was a 3% sales tax, a 3% on turnover, 3% on your invoices…it means it bears a certain relationship with what I call an imputed benefit or profit from a certain size of your invoice. This is what the British did. They went out there and got information from third parties. That means everybody who did business with this company said, "They all tell me they spent so much and therefore they gave you so much money. We're going to assume out of that money you made so much." They impute. It is the imputation of the imputation of the imputation.

First of all, it's easy to avoid and, second, it becomes very theoretical and sometimes it may become unfair but the is a political imperative here and that is people - after the crisis, you still have very high levels of unemployment in a bunch of countries. You have two issues - one is the man on the street has to pay taxes - whatever it is, 12.5%, 25%, 30% . Rich people put money in tax havens therefore didn’t pay taxes. Companies - small and medium sized companies pay taxes [and] are constrained by the taxes and then large companies do not pay taxes. The difference between the two cases [is] the first one was illegal, [but] the second one was legal because we built these rules to avoid double taxation.Therefore we now have to get back and rewrite the rules. This is a complex and this is why everybody’s trying now.

Gurria is confident that national efforts, like those of the UK, will be withdrawn as soon as there is a global deal:

What everybody has agreed, whether it is France or whether it is the UK or Italy or Spain, whatever it is, the moment there's an OECD deal on the table then they will start a sunset and they will roll [away] their temporary measures and they will go with the OECD solution.

My take

If we can get an OECD solution on the table sooner than expected, so much the better. That said, I fear Gurria may be overly-optimistic here. This is an issue on which national finance and trade ministers, as well as the Nick Cleggs of the tech world, nod sagely and agree that something must be done, then scuttle off to count their coffers.

Factor in also that 2020 is a US Presidential Election year. The trade war loving current occupant of the Oval Office isn’t going to miss out on an opportunity to ‘MAGA-up’ the situation by defending American digital firms from beastly foreigners trying to ‘steal’ US tax revenues.

But it’s clear that Gurria is determined to push forward on this, so let’s see what we end up with June as a first draft.