Why ‘Digital Taxes’ Are the New Trade War Flashpoint

(Bloomberg) -- Internet companies have long been the target of complaints that they don’t pay their fair share of taxes. The backlash has only gained momentum during the pandemic as deep-pocketed technology giants benefited from more online commerce and cash-strapped governments searched for new sources of revenue. Slow progress in global talks to thrash out new tax rules for the internet age has already led some nations to impose so-called digital services taxes – levies on local sales of companies such as Facebook and Google. The U.S. asserts that such taxes are less about fairness and more about hobbling American firms, opening another front in the trade war.

1. What’s wrong with the current system?

In a globalized economy where data is the raw material, it may no longer make sense to tax companies based on their physical presence, or to use century-old rules for allocating profits to different jurisdictions. In the European Union, for example, authorities say the average tax rate for a digital business is 9.5%, compared with 23% for others. That perceived injustice became a hot topic after the 2008 global financial crisis, when a public outcry over bank bailouts spurred governments to tackle tax evasion. Work at the Organization for Economic Cooperation and Development, a club of 37 mostly rich countries, spawned a crackdown on havens and loopholes but did less at first to address the thorny issue of how taxing rights are shared among countries. In an effort to tackle that, the OECD has been working with 140 countries in recent years to define rules, along with a broader framework to establish minimum corporate tax rates.

2. How does a digital services tax work?

France unveiled the world’s first digital services tax in 2019, which aims to directly tap the revenue of tech firms instead of calculating what share of the company’s profits can be taxed and where. The 3% levy on digital revenue, such as targeted advertising and the sale of data, hits companies with at least 750 million euros ($878 million) in global revenue and digital sales of 25 million euros in France. Of about 30 businesses affected, most are American, but the list also includes Chinese, German, British as well as French firms. For 2019, the French government said it expected to raise about 400 million euros with the new levy.

3. Which countries plan digital taxes?

European countries either adopting or considering digital services taxes include Austria, Spain, Italy and the U.K. Outside of Europe, Turkey has also imposed a digital tax. India has an “equalization levy,” known locally as the “Google tax,” which targets non-resident companies engaging with or selling to Indians. That tax is designed to safeguard against lost revenue in India from e-commerce operators.

4. How did the U.S. fight back?

The U.S. has launched investigations into the moves of at least 10 countries, citing Section 301 of the U.S. Trade Act of 1974, which allows it to retaliate for trade practices it deems unfair. It’s the same tool used to justify U.S. tariffs on Chinese goods for alleged theft of intellectual property. The U.S. hit back in July 2020 with planned tariffs of 25% on a series of French goods including makeup, soap and handbags worth about $1.3 billion. But as part of a deal brokered between the presidents of the two countries, the U.S. delayed implementation of its measures and France suspended collection of its tax to the end of 2020. That truce aims to give more time to get a deal through the OECD on new rules, at which point France says it would withdraw its own tax.

5. How could this get resolved?

Global technology companies are mostly supporting the OECD process in the hope of finding a consistent approach and avoiding what they see as a chaotic mushrooming of unilateral measures around the world. In February 2020, Facebook Chief Executive Mark Zuckerberg said he wanted the OECD process to succeed, even if that means his company has to pay more tax and in different places. Adding to the pressure, some platforms are simply passing the cost of the taxes onto consumers. Apple Inc. said it will raise prices of apps and in-app purchases to reflect Turkey’s digital tax and adjust proceeds for developers in France, Italy and the U.K. The outcome of the U.S. elections in November may change the dynamic, but lawmakers from both of the main political parties see digital taxes as an unfair attack on homegrown companies.

The Reference Shelf

• Why the pandemic has focused cash-hungry tax collectors on a $26 trillion pot of digital gold.
• QuickTakes on the U.K.’s digital tax plan, the failed EU-wide digital tax effort and ways the EU is reining in big tech.
• The editors of Bloomberg Opinion say France’s tax is wrong, and so is Trump’s response.
• A column from Bloomberg Opinion’s Lionel Laurent: Globalization’s Winners Are Pandemic Tax Targets.
• An OECD report from 2018 on tax challenges arising from digitalization.

©2020 Bloomberg L.P.