There has been a global consensus for nearly a century that countries should tax multinational companies in the jurisdictions where they create value, not where they generate sales. But that consensus has begun to fall apart as digitalization has made it easier to serve regional markets remotely and Internet companies have successfully capitalized on the opportunity. A growing number of countries, from the United Kingdom and France to Chile and Australia, are now looking to impose “digital services taxes” (DSTs) on a select few of these Internet companies—mostly American—on the dubious theory that users are creating a significant share of their value, so their profits should be taxed where their users reside. Does this push for DSTs represent a legitimate reaction to a business model that merits special treatment, or is it just an attempt to grab revenue from high-profile U.S. Internet companies in potential violation of longstanding tax or trade agreements?
On June 11, 2019 the Information Technology and Innovation Foundation held a panel discussion on the implications of DSTs for the digital economy and international tax law. ITIF Senior Fellow Joe Kennedy presented findings from an ITIF report that outlined the need for the international community to multilaterally reject DST proposals.
Following the report presentation, a panel of experts further discussed the arguments for and against the adoption of DSTs. Respondents also had the opportunity to voice their opinions on the proposals and their significance to broader efforts to reform multinational tax law.
Joe Kennedy opened the discussion with the presentation of his findings, noting that multiple countries are considering the adoption of DSTs. This would include a 2-3 percent tax on revenues with high thresholds in efforts to spare smaller companies. However, the argument in favor of DSTs fails to recognize the implications regarding the taxation of multinationals, hindering the ongoing effort to stabilize international tax rules.
Tax competition has increased in recent years due to companies’ improved ability to pinpoint productive activity in specific countries and export worldwide. While the primary justification for the proposals is that Internet companies are under-taxed, it was found that the Internet companies’ average taxation is comparable to that of other industries.
Those in favor of the proposals claim that the user creates great value, thus the profits should be taxed where the user lives, as opposed to where companies have an established presence. Kennedy challenges this claim by stating that, while users may provide data, the main source of value lies in the technology, software, and customer service a company provides. Further, taxing profits based on the user’s residence violates longstanding international agreements.
Daniel Bunn, Director of Global Projects for the Tax Foundation, then detailed how DST proposals vary greatly among European countries. He noted that multiple nations argue for the increased revenue from Internet companies, yet the revenue scale is comparatively small. Bunn highlighted the forecasted revenues of multiple European nations. Based on estimate of a 3 percent digital tax service rate, the EU expected to bring in 1.1 percent of the 2017 corporate tax revenue. Austria was predicted to bring in 0.3 percent of the 2017 corporate tax revenue.
Following Bunn’s remarks, Second Secretary of the British Embassy, Freddie Wootton, discussed the UK’s proposal. However, he emphasized the nation’s effort to address any challenges multilaterally within the OECD. He stressed that the UK proposal aims not to maximize revenue but to attain a fair and sustainable outcome for corporations. Given the ongoing global impact of digitalization on international economies, Wootton noted that the UK views the proposal as a provisional solution until there is further progress within the OECD.
Barbara Angus, the Leader of Global Tax Policy for Ernst & Young, then discussed the objectives of the OECD and G20 projects which included universal agreement on a new framework for taxing multinational business activities. In efforts to address the emerging tax challenges of digitalization, Angus emphasized the two pillars of the OECD project. The first included the initiative to change existing profit allocation and nexus rules. The second was the establishment of global anti-base erosion rules.
Overall, there are various policy and political challenges that surround the DST proposals. Given these implications, the need for global agreement is critical in efforts to fairly determine the proper tax treatment for multinational companies.