The Digital Economy: A Taxing Question

Taso Advisory
Jul Thu, 2020
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  • 2020 was earmarked as the year to resolve taxation of the digital economy at international level, based on a common understanding among the world's largest economies that a joint solution is the best way forward.
  • Difficulties in finding consensus on digital services taxes (‘DSTs’) have been more prominent in recent months, calling the timeline into question.
  • This blog takes stock of some of the pressures at play and looks to upcoming milestones which could influence whether an agreement is reached this year.

THE CHALLENGES IN REACHING CONSENSUS ON TAXING THE DIGITAL ECONOMY

NEGOTIATIONS THROUGH THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (‘OECD’)

The OECD is producing policy proposals and leading negotiations over how to better capture the realities of the changing global economy. There have been long standing discussions convened by the OECD on how to reform global taxation generally, and the organisation was mandated by the G20 to find consensus regarding the digital economy by the end of 2020.

Most recently in June, the US raised doubts about the OECD timeline when it called for a pause in talks and a resumed effort later in the year. The US pointed to an “impasse” in talks under the OECD’s first pillar of work, which would allow countries to raise taxes in a way that better reflects companies’ sales in their jurisdiction. A second pillar, seeking a global minimum tax rate, had proceeded with more success and was closer to agreement.

There have been mixed messages as to the extent to which the US has actually halted their engagement. Since the call for a pause, the OECD has sought to clarify that talks have not ceased and the US remains involved.  

Whether an international solution can be reached is an open question. This uncertainty stems from the fact that US-headquartered tech companies tend to be the burden bearers of taxes aimed at the digital economy, with the added politics of the upcoming US election in November. The balance of these two factors versus the threat of a fragmented approach - outlined below - will decide whether an agreement is reached this year.

THE RISK OF A FRAGMENTED APPROACH

Individual countries already have their own DSTs which, for the most part, raise a levy on the revenues generated by the digital economy. These have different rules and are in varying stages of implementation - which adds pressure to reach an OECD agreement. Policymakers and corporates are keen to avoid a patchwork set of DSTs each with varying compliance requirements, fiscal obligations and implementation periods.

To name but a few, the UK is pushing ahead with its DST, implemented in April, which taxes revenues but the first DST liabilities are not due until 2021. Others such as France had previously paused the collection of their DST on condition of pursuing an agreement at international level through the OECD. Since the United States’s call for a pause in talks, France could move ahead with collecting accrued sums.

Adding weight behind EU Member State DSTs, the European Commissioner for the Economy Paolo Gentiloni and Executive Vice President Magrethe Vestager have both said that Brussels is prepared to revive their proposals for an EU-wide DST if needed, as well as supporting Member States’ own measures in the interim.

A patchwork of individual DSTs is nobody’s desired outcome, which applies pressure to reach a harmonised approach through the OECD. Yet, taking the above into consideration, a fragmented set of tax obligations remains a distinct possibility if talks fail, especially whilst governments look for tax income to bolster their ability to recover from the Covid-19 pandemic.

TRADE

DSTs quickly became embroiled in trade disputes and this is set to continue. The US has threatened tariffs in retaliation to other countries’ (such as France and the UK) attempts at taxing the digital economy. The main reason for Washington’s threats is their view that US firms facing larger tax burdens in other jurisdictions could reduce US tax income. The US has since issued further plans to investigate - and possibly retaliate with tariffs against - the DTSs of Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey and the UK.

Turning specifically to the UK, DSTs also come into play when looking at how the Government casts its post-Brexit trade ambitions. The UK’s DST will likely be on the table during the ongoing US-UK trade talks. The US has already voiced its opposition to the UK’s DST and it is a clear distinction between the two sides’ starting positions which could be traded for concessions.

LOOKING FORWARD

It is clear that there are steep policy and political hurdles to overcome to meet the self imposed deadline of the end of 2020. The run up to the G20 in Saudi Arabia as well as the summit itself on 21-22 November is expected to be where the conclusion of the OECD’s work is sanctioned by global leaders. Ahead of the summit, discussions in the OECD and G20 will continue.

Overshadowing all of this is the US presidential election, scheduled for 3 November. The new President will be key in deciding the US approach to international organisations, trade, and ultimately whether progress on DSTs is made on time at an international level or pushed back to 2021.

Taso Advisory supports clients with the political, policy, and regulatory challenges they face, and helps them to design and deliver credible responses to mitigate risks and seize opportunities. We make complex challenges simple, give actionable advice, and support in delivery. You can find out more about what we do and who we work with

For a confidential discussion about how we can keep you updated on the taxation of the digital economy, or more broadly, please get in touch by emailing [email protected] or by calling +44 (0) 20 3488 4489.

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