Digital tax breakthrough

But the road to a common tax code still has several hurdles

The consensus at the G-20 Summit in Fukuoka, Japan, on levying taxes on digital multinational corporations promises to lead to a tectonic shift in the way the global economy works. The devil will be in the detail before this in-principle agreement can be codified into a common taxation system that is accepted across multiple jurisdictions. In addition, the US, home to most of the world’s digital giants, is opposed to the new proposal, which is being championed by the UK and France, among others. In that sense, the proposed deadline of 2020 for stitching together a common digital tax code may be unrealistic. However, this consensus should mean that the tax incidence on large multinational online businesses will rise. This will also limit the comparative advantage of small tax havens in attracting a certain kind of companies.

 
Global digital companies such as Google, Facebook, Amazon, Apple and others face criticism for cutting their tax bills by booking profits in low-tax countries, regardless of the location of the end customer. Such practices are blatantly unfair. The companies rely on a broad theme of tax avoidance. They tend to locate regional headquarters in countries like Ireland, Botswana and Luxembourg, where tax rates are low. As a result, profits made on revenues derived from doing business in other nations are taxed at lower rates. The G-20 proposal could attempt to impose a common minimum tax on such profits. Or, it may try to achieve an international consensus that such profits should be liable to tax in places where the revenue is generated, regardless of the corporate’s physical presence. The other option being considered is to have an agreement to reallocate profits registered in one nation, across all the other nations where that profit may be derived.

 
But there are several hurdles to achieving such a consensus in practice. One is that there is no broadly accepted definition of a digital company. In many cases, the companies in question also have multiple revenue streams from different segments. For example, it may be selling physical goods (which could be sourced either from within a given nation, or imported from elsewhere). Such a company may also be providing cloud-hosting services while running servers located elsewhere, or it may be deriving advertising revenues from nation “A” while displaying content generated in nation “B”, and it may be running fintech services across borders as well. All this will further complicate definitions of “digital” businesses.

 

To properly assess tax incidence across borders, and to prevent either tax evasion by companies, or double taxation by the authorities, there would have to be high levels of cooperation between national tax authorities and, probably, access to cross-border data for verification purposes. This will also be extremely complicated due to demands from many nations (including India, China and Russia) that data collected from their respective citizens should be stored and processed within their national borders. Given wide variations in national privacy legislation and in local digital infrastructure, this could well become a sticking point in negotiations.
 
Despite the hurdles on the ground, the G-20 communique marks an important change in the global attitude to digital businesses. It should, eventually, result in consequent changes to tax codes. It would favour big markets such as India and South Africa, over small tax-havens such as Botswana. This seems to be the fairer option: The nation where the revenue is generated should have the first call in terms of taxing the profits as well.