Daily Tax Report: International

INSIGHT: New Tax Concepts Could Hit Where it Really Hurts

April 3, 2019, 10:02 AM

When the Dutch Parliamentary Standing Committee on Finance invited me recently to take part in a roundtable discussion on taxation of the digital economy, I grasped the opportunity with both hands—not least because I believe that discussions on this topic are often clouded by false assumptions.

I have found that these discussions very quickly tend to turn to tax avoidance, and when that occurs, people often point the finger at “those tech giants”—overlooking the fact that the whole world is digitizing at such a rapid pace that our current tax system may not have kept up.

A Fundamental Question

Taxation in the digital economy concerns the fundamental question of whether the current division of taxing rights among countries is still fit for purpose. This is a relatively new debate as well as a complicated one, because there is no simple answer.

The rise of globally operating technology companies is causing headaches for tax policymakers.

Where should these kinds of companies pay tax: in the country where their decision-makers, designers and IT people are located? Or in the countries where they serve very large numbers of customers? Today, a digital business may no longer need to employ staff in those countries, but they do have a large footprint.

The urgency of the question of where companies should pay tax continues to increase with the growth of globally operating platforms such as social media, search engines and platforms that allow for supply and demand of accommodation, taxi services and other services and goods. It is par for the course that we are already seeing similar hybrid platforms crop up in the sharing economy, for example, in the energy and telecommunications fields.

Reform Needed

The realization that taxation in the digital economy requires the reform of tax systems worldwide is currently high on the agenda of the Organization for Economic Co-operation and Development (“OECD”). It is a huge task, because unfortunately national tax authorities have widely differing viewpoints.

Some countries may not be in favor of change because they do not see a problem with the country of the decision-makers, designers and IT people taxing the profits. Other countries not only ask for taxation of users of digital services, but would also like to extend taxation to the sales of cars and other consumer goods.

There are various groups of countries, each of which has its own perspective on the problem. Getting them to adopt a single line within the OECD is a major challenge. If consensus cannot be achieved, or countries do not want to wait for it, individual countries could introduce their own tax measures. For the international business community, this would involve a real danger of double taxation.

In 2018, in an earlier attempt to introduce a uniform regime across EU member states, the European Commission proposed the introduction of a digital services tax. To date, member states have not only failed to agree on the design of this potential new tax, but also have actually moved ahead individually, bringing in their own similar taxes.

Additional taxes do not necessarily make the system fairer. On the contrary: because these unilateral measures give no consideration to agreements in existing tax treaties, they have exactly the opposite effect—and can result in double taxation. This could make “the cure worse than the disease.”

Range of Measures

I can hear you thinking: “What do you mean, double taxation?” After all, we are continually hearing the observation that multinational companies do not pay their fair share of tax. But is there any truth in that?

If tax avoidance does still exist, that would mean that nothing concrete has come out of the battle against tax avoidance that started in 2012. This battle followed increasing calls for action by the public and media.

Fortunately, this is not the case. On the recommendation of the G-20 and the OECD, the world—including the EU and the U.S.—has rigorously tackled tax avoidance through a whole range of legislative measures. The bulk of these measures came into force in 2018 and 2019: indeed, the OECD has argued that the whole base erosion and profit shifting (“BEPS”) project has been a huge success.

So, the assumption should be that all multinational companies are paying or will pay tax in accordance with these new rules.

What is also important to realize is that, in addition to the tech giants, many of the platforms and digital services that we use every day in the Netherlands (and the rest of Europe) and which we do not necessarily associate with high-tech companies, will be hit by the digital tax.

It is therefore only logical that the international business community is suspicious of current developments. They are right to be so, because whatever is agreed upon is going to have a major impact on individual businesses. If different countries start creating their own rules, the costs of double taxation and the administrative burden of meeting tax liabilities could rise sky high. And who will ultimately be paying for that? That very well may be the users of these platforms (you and me).

Winners and Losers

Although the OECD countries are clearly well-intentioned, two important hurdles still stand in the way of a quick solution.

Firstly, where one country stands to gain, another stands to lose. It goes without saying that in a tax system based on a user charge, countries with a proportionally small home market will not benefit. Pity the legislator who must tell their national parliament that international taxation has become much fairer, but that it comes at a price of a significant drop in tax revenue.

Secondly, some countries will find that giving up sovereignty in order to achieve consensus will be unpalatable. And they may be right to feel that way.

There is a huge task ahead, but it is necessary. The new world economy is here to stay. This calls for new tax concepts which, in some places, could hit where it really hurts—not only for the taxpayer, but also for the tax collector. Then the boot would certainly be on the other foot.

Marlies de Ruiter is EY Global International Tax Policy Leader.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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