Podcast: The Dangers of Digital Services Taxes, With Clete Willems

July 27, 2020

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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. Rob and Jackie discuss the dangers of this approach—and how policymakers can protect U.S. firms—with trade expert Clete Willems, partner at Akin Gump Strauss.

 

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Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, founder and president of the Information Technology and Innovation Foundation. We’re a DC based think tank that works on technology policy.

Jackie Whisman: I’m Jackie Whisman. I handle outreach at ITIF, which I’m proud to say is the world’s top ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new technologies. In this episode, we’re talking about trade policy, including taxes on digital services.

Jackie Whisman: All right. I am definitely no expert on the digital services tax so you’ll have to bear with me here, but I do know that much of the recent trade discussion, a lot of which we’ve covered on episodes of this podcast, has focused on how the Coronavirus has increased tension between the US and China. But much of the discussion has been around efforts to localize supply chains or implement other export control measures. But there’s another trend emerging, which is momentum to impose taxes on digital services around the world, targeting internet companies.

Rob Atkinson: Yes, absolutely. Countries like France, for example, have been looking to figure out a way to tax corporate revenues that are now taxed by the US government of multinational internet companies, companies like Google and Apple and other companies like that. And they’re encouraging their European neighbors to follow suit. And we wrote about this last year and why it’s a bad idea. So let’s get into the why with our guest.

Jackie Whisman: Clete Willems is a partner at Akin Gump where he advises clients on international economic law and policy matters. Previously, he served in the White House as Deputy Assistant to the President for International Economics and was Deputy Director of the National Economic Council and part of the National Security Council while he was there. Before the White House, he served at USTR, the House Budget Committee and for former speaker, Paul Ryan. He’s a great friend of ITIF and also of mine personally. So I’m so happy he’s here. Welcome, Clete.

Clete Willems: Thanks. Thanks for having me.

Jackie Whisman: So I wanted you to come talk to us because you wrote about this issue in a really accessible way in an op-ed for CNBC called “Digital Taxes are an Even Bigger Threat to the US Economy During the Pandemic,” which we will link to in the show notes. So to kick things off, can you explain DSTs and why the Europeans are doing it?

Clete Willems: So basically what I’m going to start with is a discussion of France, because, as you noted, France has really been at the forefront of this. They have been the country most inclined to try to put this into place quickly. And most countries around the world have made proposals or adopted measures similar to France, but for the sake of simplicity, let me start with France. So basically what they’re trying to do is they want to put a 3% levy on the revenues that are generated from providing either digital interface services or targeted advertising within France. And what is really unique about what they’re proposing is number one, that they’re proposing it on revenues and traditionally in the tax space, tax profit, not revenue. So that’s one element of this that’s unique. It’s also unique that they had proposed to do this retroactively and to collect essentially back taxes from companies. They’ve also proposed what are certain revenue threshold, and basically you need to do so much business globally or within France to even qualify in the first place.

And so what the implications of this is basically that they’ve set up a tax regime that’s going to target US companies that provide these kinds of services. It’s something that is really problematic for the United States and something that really, I would say, unifies the President’s advisors. And I joke to back to my time in the White House, we didn’t agree on a lot, we definitely agreed on digital services taxes. And for folks like me from the National Economic Council, when we would go in and we talked to the president about all the difficult things that Europe was doing, and he would say, “Well, I want to tax cars.” We would say, “No, go after this instead, this is really bad stuff. It aims at the heart of American innovation, and it’s a problem that we need to fix.”

Now, there have been some discussions about trying to put some type of international framework into place here at the OECD, but those have largely been unsuccessful. And so what’s happened, as you alluded to, is that France was at the forefront of this, a couple of other countries we’re looking at it, but what’s happened now is with Coronavirus and the need for all of these countries to have more revenue to pay for their stimulus, this kind of measures proliferated around the world. Started in France, but now we’re seeing it in a bunch of other countries in Europe. We’re seeing it in India and Indonesia, even Brazil and Chile and Kenya. And so it’s really a problem for the US and something that [inaudible 00:05:36] put his foot down.

Rob Atkinson: One of the issues I think is occasionally I’ll give a speech overseas, I’ll get a small honorarium. And occasionally the country will try to impose income taxes on that, even though I live in the United States. And when they do, like the Canadians love doing this, I get a credit back from my American taxes. So basically what they’re doing is they’re taking tax away from the US government and applying it to their own government, but I get a credit. And that’s what I don’t think a lot of people understand or is potentially what’s going to happen. This isn’t just about taking money from super big profitable internet companies, they would get credit on that potentially in the US system. And so it’s basically taking money away from what would be US tax dollars. So we would have less money. They would have more money. Do you agree with that?

Clete Willems: That’s absolutely right. And one of the things that I mentioned in the op-ed that I wrote was that this was particularly harmful to the US not only because it was going after some of our most successful, most innovative companies, but ultimately that it was robbing US taxpayers. And that was, I think something that, that has been very troubling to this administration as well.

Rob Atkinson: One of the issues that the French claim they were doing this for was, well, we want to see a global or an OECD solution, and this was sort of blackmail if you will, a gun to the head to get that. And that’s a process that certainly, as you know, but maybe our listeners don’t know is what’s called the OECD BEPS process, the base-erosion profit shifting process. And it was designed really for a very good idea, which was that under the way the current global tax rules work, there are tax havens like the Isle of Man and places in the Caribbean where companies can park money and avoid paying taxes to somebody. And we’ve always believed that that’s wrong and they should close those loopholes. Why wouldn’t that be enough here? It seems to me if you do that, the only issue really is a company paying taxes? Then you get into this question of where they’re paying it, but it seems to me like you can do that. And you’ve solved a lot of the problem for the globe.

Clete Willems: Well, I agree with you. And that really has, in many respects, been the US position. The US has tried to work through the OECD. They’ve really been looking at two separate, but somewhat related issues, which is one, making sure that everyone globally is paying a minimum level of tax. And that’s what people refer to as the pillar two of the OECD negotiations, an area where the US has been very engaged and made a range of proposals. The other part of this in pillar one is about the allocation and to whom do you pay taxes and look, from the Europeans perspective, we are in a globalized economy and it may make some sense for us to look at, okay, how do these multinationals, how should they just distribute taxes on their profits globally? And that’s a legitimate point the US has also been willing to deal with, but what the Europeans have wanted to do is has wanted to focus it first and foremost on digital companies and then get to the rest of the multinationals.

And that goes back to why I think the US has tried to engage through the OECD in good faith and say, “Hey, let’s look at how we deal with multinationals, but you can’t just start with our companies and not deal with yours at the same time.” And that’s been part of the reason why this breaks down, and I always like to point out to my friends in France and I’m being serious, I’m very close with a lot of people in the French government, that you do often criticize the US as not being multi-lateral enough. And maybe we deserve some of that criticism, but this is the perfect example where the US is trying to work in good faith through a multilateral organization and France is the unilateral cowboy who is saying, “I’m not going to wait for an outcome. I’m going to go forward anyway.” And it really is the opposite of what most people perceive to be the way that the US and France and others engage in the multilateral system.

Rob Atkinson: So, as we’ve written about this in the past, our analysis, what this is really about what’s happening with the digital economy is historically you had imports and exports and countries would import goods. And so we don’t produce all of our cars, or we don’t produce all of our bottled water, all of our wine. We import that, some of it, and we don’t tax, under global tax rules, you don’t tax the profits of those companies just by simply importing into the US. We don’t have the right to tax Perrier or Mercedes Benz, Daimler Benz, just because they import something to the US. That’s really what Google is doing, or Facebook, they’re exporting an information service to France and the French don’t like that. And our answer to that is, “Well, why don’t we have a 5% tax on all sales of Perrier coming into the US? This is an import it’s important, and we should be getting tax payments out of that.” Obviously I’m sort of tongue in cheek with that, but I think conceptually the same thing, there’s really no difference. It’s just an import.

Clete Willems: Yeah. I think that’s a great point. And I actually would encourage people who are listening to take a close look at this Section 301 report that USGR produced on the French measure, because it walks through this precise issue. And there’s a chart on page 14, I’m even cited, that basically says what’s covered by France’s law and what’s not. And let me just read a couple of these to you. For example, if a small enterprise sells through the Amazon marketplace, that’s something that’s covered, but if it’s from the Amazon inventory, it’s not. If an individual sells a purse to another individual on eBay, it’s covered. But if Louis Vuitton sells that same purse through its website, it’s not. If it’s sold on the Amazon marketplace, it’s a DVD or a CD, that’s covered. Spotify is not. If a driver uses Uber, that’s covered, but if a French taxi company has a website that you can pay through, that’s not.

And so that’s the whole point, is you’re not treating services equally. You’re basically looking, look, is there a foreign company who provides a digital interface? And if they do that, we’re going to tax them, but we’re not going to tax the equivalent French company that is generally seen as a brick and mortar, but just happens to have a website. And that’s precisely what the US has been saying and the OECD is, you got to treat these things fairly and if do that, we’ll play ball. You can’t design it in a way so that the country who just so happens to have these innovative digital providers is the one that gets hit. And that’s the United States.

Jackie Whisman: How can the US encourage the cooperation that’s necessary to come up with a global solution here? I mean, you’ve been part of these negotiations or negotiations like this for your whole career. And I guess the main concern here, at least with us, is making sure countries don’t enact digital taxes that discriminate against US companies.

Clete Willems: Look, I think the US had to move on this and the way that they have under 301 and two to really make clear to countries that if they act unilaterally before the OECD is able to resolve this, there’s going to be a price to pay for it. I do think that was appropriate. I’ve been opposed to a lot of the different enforcement actions that the administration has taken, some of the things they’ve done under 232, but I think they’re dead right here that you can’t let other countries get away with this. You need to send a signal that there is going to be a repercussion. I think the US also needs to act constructively through the OECD and they need to stay engaged on that and they need to make good faith proposals and actually recognize, look, we are in a globalized economy.

Maybe our companies are going to have to pay some taxes to these foreign jurisdictions, I think they need to acknowledge that. But again, it’s important for them to come to that in a fair way. And let me be just a touch more precise on actually both of these things. First, on the 301 side, I want to remind folks that the French investigation started last July. I believe it was July 10th and the 301 statute says that USDR has to make a determination on whether there’s a breach of the statute and then on what sort of action they’re going to take within 12 months, which just so happens to be this Friday. One of the things that I think is under discussion, that I think is a good idea, is that USDR would say, “Look, France has breached 301. Because again, this is clear the measure is discriminatory. We will put in tariffs or other types of measures as soon as they start collecting.”

And so right now, France has said they’re going to start collecting on January 1. I think the US could tie the tariffs or whatever other retaliatory measures they want directly to that date. And so the US doesn’t take trade action unnecessarily. It is directly tied to what France does, so it puts the ball and France’s court and says, “If you want to go down this path, that’s your choice.” And then it gives them six months to keep working it out at the OECD.

That brings me to my second point. How do we work this out at the OECD? I think both sides need to show a little flexibility, to be honest. And the Europeans right now are saying, “We understand that there’s this broader problem of nexus, but we want to start with digital companies and then we’ll turn to the other service providers.” We’ve got to do them all at the same time, because as I was just mentioning, if you don’t do them all at the same time, it’s discriminatory. I think you also through that process, you need to look at the threshold and make sure you’re not carving out your own companies. So Europe needs to show a little flexibility. I’d also say the same to the US. The US had been negotiating this. And then at one point during the negotiations, they came with a proposal saying we should get a safe harbor and essentially make these new rules optional.

And again, I can get why the Europeans wouldn’t think [inaudible 00:15:17], that you negotiate this whole new framework on taxes, and then you just make it an optional safe harbor. So again, I think the US should show some flexibility too. If both sides say, “Okay, we’re going to tax everyone equally who provides these kinds of services, digital, or not.” That to me is the way you get to a multilateral solution. And then hopefully that could be effectuated in time so that USTR wouldn’t actually have to start applying the tariffs, wouldn’t have to start collecting its tax in the absence of guidelines on how to do that.

Rob Atkinson: So Clete, just one more question on this issue. By the way, for the listener, 301 is a trade arcana term from the 1974 Trade Act, it allows us, the United States, to impose tariffs under certain conditions. The whole track one that the OECD is doing, at least from my read of it. I mean, I guess the US has pushed back. I’m surprised that it’s gone as far as it is, because it really, to me, seems almost strange. It has this weird view of digital, that track one should be really about digital. And to me, it shouldn’t be about that at all. It should be about, and it’s all based on this notion of this, I think mythology, that these companies are adding value in these places. And therefore you have nexus to allow taxing, which is like really, so European is adding value when they go onto a Google search engine. I don’t think so.

Clearly we can tax Mercedes here when they have a factory here, they’re adding value to a car. They’re assembling it here. Sure. You get to tax it. But if they’re just taking a car from Stuttgart, putting it on a boat, bringing it here, we don’t get to tax the company. We can tax the car as a sales tax. So I don’t know, just your thoughts on that. It seems odd that the OECD has gone down that path.

Clete Willems: Well, my understanding is that it didn’t always start that way. And again, in light of globalization, I think it’s fair to say we need to think about the appropriate taxation of multinationals. How do you distribute those rights around the world? I think it’s also fair as they’re doing to say, look, we need to look at minimum tax and that’s where it started about. But my understanding is that after sort of the process they kicked off, the Europeans made a huge deal about digitalization and really the need to single that out. And it is that prioritization that I think has caused some of these problems. And so my suggestion is if you’re ever going to get a multilateral solution, you need to make it about everything. If you just make it about digitalization, it’s going to be seen as targeting the United States and that’s not something the US is going to be able to stand for.

And one more point on this, because I think it’s important, is part of the reason that there is also so much US angst about it is not just because of the impropriety of a discriminatory tax in and of itself, it’s because it’s also happening against this backdrop of Europe saying that they want to have digital sovereignty, and they want to create European champions that can compete with the likes of Google and Facebook and Amazon and everyone else. And so there is some notion there that maybe this isn’t just about fairness, maybe this is also about protecting their marketing and creating their own champion. And that’s why I think also a bigger problem for the United States than just a tax issue.

Rob Atkinson: I’ve always find that digital sovereignty thing fairly disingenuous on my EU colleagues’ part. Last I looked, we’re buying Erickson and Nokia equipment for our 5G network. We’re not talking about US sovereignty in 5G equipment. We’re happy to buy European equipment, but they don’t seem to recognize that. And then they go, “Oh, you guys are dominant.” No, we’re not dominant in telecom equipment. You’re dominant, other than Huawei. Speaking of Huawei, one question before we ask you the final question, and that’s you were involved with some of the China negotiations that President Trump engaged in. You can argue it’s square or flat, but they had the phase one deal, obviously a phase two deal is not going to happen, at least in this year. If the President were to be reelected, any sort of looking at the tea leaves prognosis on where we’re going with that? Are we going to get a tougher deal? Asking for more of this deal? Didn’t really address the major irritants of what China’s doing.

Clete Willems: Well, first, I think people need to realize how hard it is to get any deal with China. And I was one of the negotiators and it was incredibly challenging to get them to change what a lot of their leadership believes have been effective policies to allow them to very quickly become a dominant global player in a certain industry. When you look at “Made in China 2025,” you look at discrimination, you look at the subsidies, that’s not stuff they want to change. They think it’s worked for them. And so it is very hard to get a deal at all. I do think that the phase one deal is probably a little more significant on the structural side than we give it credit for. We’re talking about tech here. So I do think the IP chapter was pretty robust, especially some of the stuff on trade secrets and other areas.

You’re right, it isn’t everything we need. So, what happens moving forward? Well, I would, instead of just saying what happens in a Trump II, I think the better question is like what happens next year, regardless of who’s elected? Because I think the answer is basically the same. The one issue that everyone seems to agree on in Washington is we need to be tougher on the Chinese. And so I think regardless of who’s elected, we are going to continue on the trajectory we are, where the broad range of our policymaking is focused on pushing back on China’s unfair play. I don’t think that changes under either administration. What I would like to see either the President, if he gets reelected or Joe Biden do, if he gets elected, I think to more effectively marshal the international coalition on this. And that’s always easier said than done.

We’re talking about Europe here. I think Europe has to make noise. Does it want to have digital sovereignty like China, or does it want to promote a market based Western oriented system, along with the US? They need to make the right choice there, but I hope that we can persuade them to do that. And ultimately my view is that the best way we’re going to get China to change is going to be through a multilateral system. Because if it’s the US versus China, they’re going to see that as playing out of the Thucydides trap, we’re trying to keep them down. They’re not going to have the political space to make any moves. But if they are portrayed as an international outlier by the global system, and we have global rules that calls them out for what they’re doing, I think that’s a very different dynamic and that’s how we can really get them to change. And that’s a strategy I would like to see advocated for. And we could spend another two hours on WTO. The system is not adequate right now to do that. And I think that’s why I think WTO reform is a sleepy issue. Some people roll their eyes, but I really think it’s critical to the future of our ability to constrain China.

Rob Atkinson: We internally agreed with that and we wrote that, my colleague, Stephen Ezell and I wrote a big China report agenda, a policy agenda 2016, right after the election or right before the election. And that’s what we said.

Jackie Whisman: So final question, if Congress were to invest an extra hundred billion on technology, what should it do with this money?

Clete Willems: One of the conversations that’s happening right now in Congress that I think is the right conversation is to start talking about what do we see as strategic industries and where do we want to make sure that we are successful over the long run and can offer alternative to China? And I think through the areas that there’s a lot of discussion, that I think it’s appropriate, are semiconductors and 5G. And I do think that both of those are areas where we want to make sure we maintain a free market system, that we have private sector led solutions, but that doesn’t mean that the government can’t pitch in, provide some money for research and development, provide some incentives to help with more production in the United States.

I think that’s probably appropriate and those are some of the areas where I would spend the money. One point on this, I think is really important though, is that as we are talking about incentivizing strategic industries in the United States, there’s a right way to do it and there’s a wrong way to do it. And to me, the right way to do it is look at loosening government regulations, making it easier to do business in the United States, look at tax incentives, look at the money that we were just talking about in R&D. Positive incentive, and let’s avoid the kinds of things like discrimination or tariffs or barriers to entry. We complain about China and even as we were talking about today, let’s do carrots, let’s not do sticks, but let’s put those carrots towards some of the more strategic industries in the United States, 5G, semiconductors, artificial intelligence [inaudible 00:24:03].

Jackie Whisman: Thanks so much for being here, Clete. It’s fun to see you, even if it’s on a screen. Can you tell our listeners where they can find and follow you? Twitter, LinkedIn, CNBC?

Clete Willems: Sure. Well, LinkedIn is probably where I post most of the stuff that I’m producing, just under my name Clete Willems, and I’ve got my op-ed up there on this issue. And I’m also, I’m hoping to have a WTO reform proposal out in the next couple of weeks. I’d like to drop that in the middle of the Director General race at WTO, and really what I’m trying to do, and apropos to this conversation, is I’m trying to come up with a solution that meets some of the most pressing concerns of the United States, that meet some of the priorities of Europe and ultimately refashions the system in a way that is fair and deals with some of the most difficult challenges from China. So hopefully I’ll have that out in the next couple of weeks.

Jackie Whisman: Well, it might line up with when we drop the podcast, so that would be perfect. So thanks again. And that’s it for this week. If you liked it, please be sure to rate us and subscribe. You can find the show notes and sign up for our weekly email newsletter on ITIF.org. Feel free to email show ideas or questions to [email protected] and follow us on Twitter, Facebook and LinkedIn, @ITIFdc.

Rob Atkinson: Thanks everyone for listening. We have more episodes and great guests lined up. New episodes will drop every Monday morning. So we hope you’ll tune in next week.

 

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Podcast: The Dangers of Digital Services Taxes, With Clete Willems