The goal of both the U.N. and OECD has been to ensure at least some tax revenue is paid where digital services are consumed, rather than where a tech giant is headquartered, which is the standard practice today. That comes on top of the fact that companies that rely on intellectual property and cross-border digital transmission for their profits rarely pay any tax at all.
In recent years, authorities have resorted to obscure competition rules to claw money back, as the European Union executive did in 2016, when it ordered Apple to make more than $14 billion in tax back payments to Ireland. The decision was later reversed in the EU’s highest court.
The motivation for governments to overhaul the digital tax system is two-fold.
There’s the immediate need for cash, positioned against the fact that Google, Apple, Amazon and Facebook, alone, brought in a combined $220 billion last quarter, including $38 billion in profits. Their high profit margins and relatively low tax payments have allowed them to stockpile around $420 billion cash around the world.
In parallel, a growing band of officials and NGOs from small and mid-sized countries say digital companies don’t play fair: They make massive profits from consumers while contributing relatively few jobs and little tax income to the local economies where those consumers live.
Global negotiations pause and national taxes surge forward
The latest U.N. move comes as OECD negotiations on digital taxes have ground to a halt, thanks to the Nov. 3 election and U.S. government complaints that the OECD’s proposals are essentially an anti-American shake-down.
Faced with OECD delays, rich countries including the United Kingdom, France and Spain are forging ahead with their own national digital services taxes. They join Italy, Poland, Turkey, Austria and Hungary in implementing such taxes. It’s all part of what EU Digital Commissioner Thierry Breton said is the EU’s effort to end the “digital Wild West.”
The risk to governments and companies alike, is that after getting close to a global agreement, their efforts will permanently splinter.
Will Morris, deputy global tax lead at PriceWaterhouseCoopers (PwC), described four levels of tax action that governments need to choose between: The most basic and least effective course of action is unilateral taxes. The second level of action is bilateral tax treaties of the kind promoted by the U.N. The next step up is coordination of unilateral actions, possibly at a regional level — for example, the EU or African Union herding their individual members to adopt similar or identical digital services taxes. The final level of action is a global system agreed to either at the OECD or U.N.
Daniel Bunn of the Tax Foundation said the U.N. is aiming to send a larger slice of digital profits to developing economies: “Compared to the OECD approach, the U.N. proposal would allocate a much larger share of taxable income” to countries that serve as the market rather than the headquarters of digital companies, Bunn said.
The difference between the U.N. and OECD approaches reflect their respective memberships. While the OECD signed up 137 countries as part of its negotiations, it remains largely wedded to tax systems that work for rich exporting nations, while the U.N. is more of a forum for developing countries.
The OECD is now being squeezed on two fronts: by the U.S. and by developing economies, whose tentative support for OECD inclusion efforts has wilted during the pandemic. Take Nigeria, for example. Nigerian Mathew Gbonjubola is deputy chair of the OECD steering committee on tax reform, yet Mustapha Ndajiwo, who works for the executive chairman of the Federal Inland Revenue Service of Nigeria, told POLITICO: “I don’t think there is a lot of confidence in what is going on with the [OECD’s] inclusive framework.”
With that mindset, more African countries are also taking matters into their own hands, via both regional representatives in the African Union and unilateral taxes that go further than European proposals. Countries such as South Africa, Nigeria, Kenya and Uganda are moving toward taxing a wider range of digital activities including mobile transactions, internet data and money transfers. “The absence of a (OECD) decision is leading to epic tax loss when digital services are the single most thriving sector,” said Logan Wort, executive secretary of the South Africa-based African Tax Administration Forum (ATAF).
The OECD published its global tax blueprint in October, which included options for a global minimum tax across all industries and a mechanism for attributing some profits to the countries where a company’s customers use their services. In addition to redistributing where corporate tax is paid around the world, the OECD estimated that its measures could lift corporate tax revenues by 4 percent, or around 100 billion dollars annually.
Morris reckons the OECD will be forced to push ahead because tax is one of its core mandates. If the OECD can’t figure out a way forward, it may be headed in the direction of the World Trade Organization: irrelevance.
Yet there are some factors the OECD simply can’t control, like the next U.S. administration.
If President Donald Trump is re-elected, he may move further away from the OECD process, by pushing retaliatory tariffs against countries that implement digital taxes. Even a Democratic administration led by Joe Biden, who “wants to revisit issues of multilateralism,” will find “a very different landscape compared to four years ago,” Morris said.
With large advanced economies typically more comfortable negotiating among themselves, Daniel Bunn suspects the OECD process could morph into an agreement between a “handful of countries” — perhaps the G7 — rather than a true global deal.
Whatever happens in 2021, the immediate threat to company bottom lines is contained.
Only a handful of countries will be collecting unilateral taxes, while the U.N.’s tax language is simply a template, and does not guarantee any governments will actually use it. Under the OECD process, “nothing will happen in the next few months” because the G20 has given the body a time extension to complete its work, “but after that it could move quite quickly,” said Morris. Even if the OECD process is successful, a “multiyear implementation timeline” would follow, Bunn said.
— Simon Marks contributed reporting