Wednesday, October 27

The Growing International Concern of Digital Tax

By: Luci Lyu

If any winner emerged out of COVID-19, it would be the rapidly growing digital economy. In 2020, Zoom’s revenue spiked 369% from a year ago, Amazon’s sales grew by 37%, and Netflix’s stock price saw a 64% increase. Digital companies are not the ones affected. The pandemic has changed the way people work, socialize, and shop. As a result, many traditional companies must digitalize to stay competitive. This digitalization trend amongst corporations would likely persist, making the long-debated digital tax an eminent concern. 

In 2019, France announced its decision to implement a 3% revenue tax on digital services (DST). This spurred huge opposition from the U.S. as most companies subjected to the Digital service tax were U.S. firms. However, despite the United States’ threat to implement an additional 25% tariffs on $1.3 billion of French products, the French DTS has been in effect since January 1st, 2019. [*note that The Biden administration has recently suspended the tariffs proposed by the Trump administration ]

This is not the first time an international debate regarding the taxation of digital companies has heated. Indeed, our tax system, both nationally and internationally, was designed for an era of a more tangible commerce style. The intangibility of the digital economy makes it difficult to tax. On one hand, because of their special operating channels, digital companies’ activities are often difficult to assign to a specific geographic jurisdiction. This causes taxation methods based on permanent establishments and consumer location to be ineffective. Moreover, some segments of a digital firm’s value-chain do not result in financial transactions, leading to debates regarding whether the prevailing value-added tax system will remain apposite for taxing the digital economy.

Various issues have been raised regarding international taxation of the rapidly growing digital economy. Of them, one thing that stands out is the problem of base erosion and profit shifting. Base erosion and profit shifting (BEPS) refers to when multinational companies “shift” profits from regions with a higher tax rate to regions with a lower tax rate in hopes of paying fewer taxes. Such behavior often causes market distortions and leads to zero-sum tax competition amongst countries. 

To address the digital tax problem, Action 1 of the OECD/G20 BEPS Project offered a set of potential solutions. Countries around the world have also attempted to adopt a customized version of some of these potential solutions. The U.S, for example, is proposing a 15% minimum tax on booked income to recapture tax avoidance loss. Nevertheless, as a consensus amongst different nations have yet to be reached on taxation, the problem of international taxation of the digital economy will most likely linger.

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