For years now, developed countries have been divided over how to regulate the big tech. Whether and how to tax digital services is part of that headache. This is a complex problem requiring a global consensus. As an example, a tech firm resident in country X is collecting data from users in distant country Y, but it’s not paying taxes to country Y’s government on sales/profits derived from those users.
In other words, tech giants are doing great business in most of the countries where they happen to pay little to no tax at all. A global digital tax is the sort of measure should excite the governments in tax-starved but tech-potential-rich countries like Pakistan. The previous Trump administration had cast global digital service tax as discrimination against US tech companies and promised to fight back.
The European Union failed to pass a unanimous measure, but some of its members went ahead anyway. The US threatened France, which imposed a 3 percent digital tax on revenues from digital intermediation and digital advertising services, with import tariffs on French luxury goods. But this didn't stop Austria, Hungary, Italy, Poland, Spain, Turkey, United Kingdom, among others, from imposing digital levies.
But the US, under a new leadership, has relented. Late last month, it gave its blessings to a joint effort for a global digital services tax, which has been lobbied by the OECD since at least 2015. Now with the Biden administration at the helm, the digital tax dialogue among the OECD/G20 nations is set to resume. The pundits are expecting a multilateral deal by July later this year (which sounds ambitious).
Stung by its own experience with social media’s role in fueling disinformation and political divisiveness, there isn’t much soft corner the likes of Facebook, Google and Amazon can expect from their estranged political patrons in DC. It isn’t clear if the Biden administration is more intent on forcing the big tech to pay their fair share of taxes or if it is simply too concerned about reining in the tech lobby’s political power.
Essentially, a few big tech companies with global turnover exceeding about a billion dollars will be qualified for this tax. Most of those firms happen to be American by origin. There is no shortage of criticism, as big-time lawyers and lobbyists have been busy arguing against this measure.
The biggest critique is that the some of the countries that have imposed digital taxes have done so just to protect local tech firms, at the cost of foreign US firms. There is also this line of reasoning that a digital levy will make digital services expensive as consumers are the ones that will eventually pay extra or start paying for hitherto-free services. Then there is the risk of governments over-taxing digital services.
Expect the debate to pick up some heat over coming months. There is no denying that the digital economy is expanding at a much faster pace than brick-and-mortar economy. This is bound to have implications for national tax codes that are yet to adjust to the scale and scope of digital services. Be that as it may, negotiating an international standard for digital tax is a herculean task. The US has practical reasons to eliminate commercial frictions with the EU, but will rest of the world cooperate?