Government finances around the world have taken an astronomical hit from the Covid-19 crisis. To dig themselves out of this fiscal hole, many countries are now looking for new sources of tax revenue and have alighted on some of the biggest winners from the pandemic: Big Tech. But efforts to shake up the international tax system have been ongoing since the last economic crisis in 2008 and taxing tech companies is still proving to be a challenge.
US tech giants have repeatedly come under fire for paying very low levels of taxation around the world, despite their eye-watering market valuations and unprecedented growth rates. A report on the ‘Silicon Six’ companies – Google, Amazon, Apple, Facebook, Microsoft and Netflix – found that the gap between the expected headline rate and tax actually paid was $155.3bnn between 2010 and 2019.
The low rates of tax paid by these tech giants partially reflects the kind of creative tax avoidance employed by many multinational companies. But it is also the by-product of an outdated international tax system that pre-dates the digital era, says Anup Srivastava, an associate professor at the Haskayne School of Business in Canada.
“The nature of business is changing; previously, all corporations were organised around labour and capital, and therefore we could figure out where the economic activity was taking place, ” he says. “In the digital world, both the means of production, as well as what is being produced is all up in the air, and given that it’s almost impossible to identify where the economic activity took place, it’s almost impossible to tax it.”
Covid-19 has turbocharged the digitisation of the economy and squeezed government finances, spurring a long-overdue shake-up of the rules governing tax, adds Srivastava.
“Economic activity is shifting towards digital players more and more around the world and countries need to increase the base of taxation because they’re losing ground,” he says, adding that we need to ditch the assumption that high levels of corporate tax will slow the flywheel of innovation. “The idea that R&D is discretionary, that you need to incentivise companies to invest in R&D is long gone. For these kind of companies, R&D is required for their survival.”
Tackling tax avoidance by tech companies
The current international tax system has its origins in the League of Nations. After the fallout from the financial crisis in 2008, the OECD realised that overhaul was needed. It began coordinating discussions between more than 135 countries to rewrite the global tax system by introducing two new pillars that reflect the realities of an increasingly digital and global economy.
The first pillar seeks to ensure that countries can tax companies that do not hold any physical assets in a market but that profit from the users located there. Currently, governments outside of the US reap little benefit from the wealth of data collected from their citizens by the tech giants. These companies pay tax rates more than four times the tax on their US profits than what they pay in other regions, according to a study by Tax Watch.
The second pillar looks to address a loophole in the current system that allows multinational companies to create “stateless income” by shifting profits to tax havens like Bermuda, Ireland and Luxembourg. The OECD proposes a minimum level of global tax for all multinational companies, digital or not.
The initial deadline for the OECD talks was the end of 2020 but this has been extended to the middle of 2021 in the hopes of resolving ongoing political tensions. Recently, the OECD put forward blueprints for the two pillars for public consultation that reflect the convergent views of the 137 countries and which they hope will form the framework for an agreement.
While Europe is focused on taxing tech companies as part of a wider backlash against the growing influence of Big Tech, the provisions under pillar two to address more widespread corporate tax avoidance is “as important, if not more important”, says Pascal Saint-Amans., director of the OECD’s Centre for Tax Policy and Administration.
“We cannot ring-fence the digital economy because it’s the whole economy which is digitalising,” he says. “You have a very strong political debate [about how] we need to address digital, but they have a very narrow view of what digital is.”
Using digital taxes to curb the power of tax giants “misses the point”, adds Daniel Bunn, vice-president of global projects at US non-profit the Tax Foundation, who favours a general-purpose corporate tax that can be applied across all industries.
“Relying on political winds and the substantive changes due to a pandemic isn’t really a good basis for making good tax policy, but I definitely see it happening,” he says. “The more you complicate things on the corporate tax side, the more difficult it is to comply with it and the more difficult it is to actually audit and get the revenue you’re expecting from it.”
Unilateral measures threaten a global trade war
As the OECD discussions drag on, many countries have introduced their own unilateral solutions for taxing tech companies. Around half of all OECD countries in Europe have introduced or plan to introduce a digital services tax (DST), according to the Tax Foundation.
The digital services taxes vary greatly. While Austria’s system levies a 5% tax only on advertising revenue, Poland has settled on a tax on streaming services to support its national film institute. This divergent approach to taxation introduces a high level of complexity that is costly not only for the tech giants, which have very varied revenue streams and business models, but also for governments who have to collect and audit all these different sources.
The bigger threat, however, is that these digital services taxes “entrench long-standing imbalances” and “aggravate current tax-related trade tensions”, OECD secretary-general Angel Gurría said in a recent meeting. The US threatened punitive tariffs on France last year after it moved to start taxing tech companies unilaterally, and has launched investigations into proposals by the EU and nine other countries.
But despite delays in the OECD talks due to Covid-19 and ongoing resistance from the US, which has railed against what it sees as an unfair persecution of its booming tech sector, Saint-Amans is optimistic that a global agreement will be reached by the middle of this year.
“It’s a complicated negotiation and there are challenges, but all the conditions now are really gathered for reaching a deal [by July],” he says. “We have a new US administration involved, which has passed strong messages that they want to sort this out.”