The G7 communique of June 7articulated consensus on this topic, noting that the “impacts of the digitalization of the economy on the international tax system remain key outstanding issues,” and that its members were “committed to work together to seek a consensus based solution by 2020." As the program brochure for the Oxford Summer Conference held on July 2 noted, “the focus of the international tax community is now firmly on the digitalised economy.”
But while the focus is obvious, possible solutions are less so. More fundamentally, the nature of the problem that so many claim needs to be addressed remains is unclear. The lack of consensus over the nature of the problem is illustrated in part by the different language used to describe it: while the European Commission’s March proposed directives refer to the topic as “digital taxation” and to its proposals as “measures to ensure that all companies pay fair tax in the EU,” the OECD interim report released in the same month instead refers to challenges in the taxation of the digitalized economy.
Taxation of the digitalized economy
In the past few weeks I have participated in events discussing the taxation of the digital economy in two different continents and three different countries. Digital taxation was included in the agenda of the U.S.-China tax seminar hosted by the East China University of Political Science & Law and University of Florida Levin College of Law and was the focus of the Oxford Summer Conference and a roundtable luncheon hosted by KPMG in Paris that was organized to address responsible tax and the digital economy.
Collectively, these events have highlighted how the problem referred to as taxation of the digital economy (or the digitalized economy) is really two separate problems that have been conflated into one.
The first problem is the large economic and social disruption that has been created by digital companies, most manifest in individuals’ concerns about their jobs. Talk about machines replacing humans suggests that we are only at the beginning of the job losses – and the self-identity that often accompanies them – being launched by tech. The accounting and legal professions have not yet borne the full brunt of these disruptions, but there are ample warnings that they are soon to hit this industry, following disruption in industries ranging from banking to retail to publishing.
But the public’s concerns with tech companies’ disruptions don’t only stem from job losses; they also are derived in large part from the market dominance of a handful of big (American) tech companies. Some of these companies have grown so big, so fast, so that they often control large parts of the market for digital services and the consumption of goods via digital platforms. Related to these concerns about market dominance are concerns about privacy and data usage, and whether domestic start-up companies will be able to compete with first movers that are able to dictate rules to the marketplace globally.
The impact of digitalization with corporate income taxes paid by digital companies
U.S. tech companies may dispute the validity of these concerns, and often operate by refusing to acknowledge their existence. But for much of the rest of the world, they are very real. One consequence of tech companies’ unwillingness to confront the economic and social disruptions created by their radically innovative products is the morphing of concerns over the impact of digitalization with the corporate income taxes paid (or not) by digital companies. Because digital disruption leads to economic insecurity, concerns over the digital economy often get mixed up with how to collect more taxes from the very large profits of some of the most visible of these companies.
The question of how best to address these broader public concerns is an important one. It may be the case that traditional tools for addressing marketing dominance don’t work very well for these tech companies (this may be part of the reason why Margarethe Vestager, the European Commission’s anti-competition commissioner, has decided to go after large tech companies by using a state aid/tax ruling tool). Governments may wish to develop alternative tools for regulating and possibly assessing additional levies on tech companies that are able to extract large amounts of value from markets and hinder competition.
Who should bear the tax burden?
But the problems created by market dominance and digital disruption are not corporate income tax issues. The corporate income tax is merely a tool – and economists debate how well it performs and whether it is the best means for achieving its goals in general – for assessing a tax on profits, or the net income of companies. There’s an ongoing debate about who actually bears the burden of that tax – shareholders (presumably the target), labor, or consumers. And as poor a mechanism the corporate income tax is for addressing its ambiguous policy goals, those goals become even more attenuated when it is used as a mechanism to address larger economic policy concerns relating to wider social changes.
At the same time, the fact that digital disruption and the corporate income tax rate of (U.S.) tech companies are two different problems does not mean that corporate international tax rules as they relate to the digitalized economy don’t need rethinking. These are not primarily concerns of the digital, or even digitalized economy, other than insofar as the 21st century economy is a digitalized one. The OECD’s BEPS project largely ignored bigger picture questions of source and residency, and the allocation of profits between developed and developing countries, that needed to be revisited after having first been agreed upon over 100 years ago in a much different global economy. The question of how to revise 20th century international tax rules is an important one to be addressed by the OECD and national tax officials, but it’s not one to be conflated with the digitalized economy.
The OECD’s digital economy task force met last week to make progress on a consensus based solution to address “impacts of the digitalization of the economy on the international tax system”. Expanding the scope of the task even further – to address impacts of the 21st century economy -- might allow it to address the real issues at stake.
by Mindy Herzfeld
Professor Mindy Herzfeld joined UF Law in 2017 as professor of tax law and director of the LL.M. in International Tax Program. Prior to joining UF Law, since 2014 Professor Herzfeld has been a contributing editor for Tax Analysts, authoring weekly columns on international tax policy developments and cross-border transactions in Tax Notes International. She continues to serve as a...