Yesterday, Pascal Saint-Amans, the Director of the Centre for TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Policy and Administration at the OECD, announced that the negotiation timeline for new digital taxation proposals has been impacted by the pandemic. Previously, governments were expected to agree on a set of policies by early July in order to have an implementation plan by the end of 2020.
The timing of an agreement has now shifted to October, although Saint-Amans said that the end-of-year deadline for the overall project is still in place. He speculated that some pieces of the agenda could slip into 2021, however.
The choice to delay the negotiations reflects the current challenge of the pandemic. However, the delay also comes with risks. Those risks include the potential for unilateral digital taxes to proliferate. The OECD’s negotiations reflected the possibility of an outcome that would replace unilateral measures, but trouble could arise with or without an OECD agreement if countries are unwilling to change or remove their own policies like digital services taxes. A tax and trade war driven by those unilateral measures would be incredibly harmful to the global economy.
Governments around the world have had digital taxation on their agendas for several years, and some countries see the pandemic as a reason to make progress on proposals to tax digital businesses. Recently, both the Indonesian Finance Minister Sri Mulyani Indrawati and the French Economy Minister Bruno Le Maire have directly linked their digital tax agendas to the pandemic. Le Maire also repeated a flawed analytical point about digital companies being undertaxed.
Indonesia’s new approach to taxing digital businesses and India’s expanded equalization levy and have arrived alongside France and the UK’s digital services taxes. Other countries have similar proposals. The United States has been clear about its intentions to use trade measures to retaliate against digital services taxes, particularly the French proposal.
In some cases, these digital taxes have been presented as options for raising revenues to pay for the cost of the current pandemic. While public finances will need to be put on a sustainable path at some point in the future, the current design of digital tax plans are unlikely to fill a significant gap in revenues.
The French proposal was estimated to raise just €500 million ($545 million) in 2020.
How much is $100 billion?
The OECD’s work has been intended to provide a more productive outlet for the political pressure to tax digital companies. Instead of taxes on gross revenues, new income tax rules and apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. mechanisms could be applied but would also create winners and losers.
The initial economic analysis of the proposals show that the OECD’s approach could result in higher taxes paid by multinational businesses – up to $100 billion annually.
If the argument for continuing the progress on this effort is to raise revenue to pay for the pandemic response, two issues come to mind.
First, the scale of the tax increase is rather small relative to the size of the fiscal response to the crisis. The time for shoring up revenue sources and making difficult budget choices will come, but the nature of the digital tax project is that it creates winners and losers from a revenue perspective, and the net revenue gain is relatively small. The costs will likely be concentrated (both among a handful of countries and businesses) while the benefits will be more distributed.
Second, given the data constraints of the impact assessment, the $100 billion number does not reflect recent policy developments that impact taxation of multinationals. Both the European Union’s Anti-Tax Avoidance Directive (ATAD) and the U.S. Global Intangible Low-Taxed Income (GILTI)Global Intangible Low-Taxed Income (GILTI) is a special way to calculate a U.S. multinational company’s foreign earnings to ensure it pays a minimum level of tax. GILTI was adopted as part of the 2017 Tax Cuts and Jobs Act (TCJA) and can lead to high tax burdens on foreign profits, putting U.S. companies that operate abroad at a disadvantage. and Base Erosion and Anti-Abuse Tax (BEAT)The Base Erosion and Anti-Abuse Tax (BEAT) was adopted as part of the 2017 tax reform bill and is a tax meant to prevent foreign and domestic corporations operating in the United States from avoiding domestic tax liability by shifting profits out of the United States. are likely to impact the revenue raised by the OECD project.
Other impact assessment work will explore the harmful effects of a digital tax and trade war. According to Saint-Amans, a negotiated outcome would be much better for the economy relative to a more chaotic scenario. However, countries are reluctant to have the impact assessment published at this time.
If the delayed negotiations allow more unilateral measures to arise, then the OECD should work to tie its delay directly to the delay of unilateral measures.
Another Challenge for Digital Tax and Trade
The back-and-forth between the U.S. and France at the start of 2020 over the digital services tax and retaliatory trade measures may return with a vengeance if more countries pursuing unilateral measures put themselves in line for a response from the U.S. Trade Representative.
However, there is another brewing issue on digital trade. Since 1998, members of the World Trade Organization (WTO) have agreed not to impose customs duties on electronic transmissions. The moratorium was renewed in December, but the moratorium will be up for discussion at the next WTO ministerial conference which has also been delayed due to the pandemic.
A recent article connected the threads of digital taxation and digital trade and suggests that the digital tax rhetoric could spill over into digital trade rhetoric. If countries are looking to raise revenues from the digital economy, trade measures may become a focus. Nearly $26 trillion in global e-commerce could be at risk if countries decide not to renew the moratorium and opt instead to placing tariffs on e-commerce alongside digital taxation measures. Adding burdens to cross-border trade (whether digital or not) is exactly the opposite approach that countries need to be considering when looking at ways to recover from the current crisis.
Taming the Chaos
This pandemic has shown how quickly chaos can arise and how fast policy norms can change. Some leaders around the world are doubling down on unilateral digital taxation just at the time where multilateral forums are unable to meet to potentially forestall chaos in international tax and trade.
The challenge is for countries to recognize the global risks; something that the OECD should be allowed to highlight through its impact assessment. Without knowing the costs of unilateralism, individual countries will continue to act in their own interests by erecting tax and trade barriers that will hurt the global economy during one of its weakest moments.
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