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European Organization for Economic Cooperation and Development (OECD) countries like the United Kingdom, Austria, France, Hungary, Italy and Spain have put their own DSTs in place. Outside of Europe, countries like Canada have proposed a DST.
What’s a digital service tax?
- Just for some context: According to the World Bank, the digital economy is equivalent to 15.5% of global gross domestic product (GDP).
- In terms of growth, though, the digital economy has been growing two and a half times faster than the global GDP for the past 15 years, and governments worldwide are trying to ensure the revenues are properly taxed in the right countries, aka tax jurisdictions.
- Now, the purpose of a Digital Services Tax (DST) is to make sure that if a large tech company is looking to sell their digital services to a country, collect data, sell advertisements to and from that country’s users, that they also get taxed in that country even if they’re not physically based there.
- Several countries have proposed or put in place their own DST. So, for example, the European Commission (EC) proposed a 3% tax on revenues from digital sales, like advertising. All DSTs have domestic and global revenue thresholds, and if a company doesn’t meet those, they don’t have to pay the tax.
- European Organization for Economic Cooperation and Development (OECD) countries like the United Kingdom, Austria, France, Hungary, Italy and Spain have put their own DSTs in place. Outside of Europe, countries like Canada have proposed a DST.
So, what’s the problem?
- Well, for a digital tax like this to work, there needs to be a unified, international system that applies to all countries.
- So these DSTs created on a national level are really just an interim measure until an international agreement can be properly implemented.
- Many of these DSTs implemented on a national level include sunset clauses, which essentially just let the country remove the DST some time in the future when there’s an international system that they can switch to.
What’s the OECD’s BEPS project?
- So, the OECD’s Base Erosion and Profit Shifting (BEPS) project is that international agreement that OECD countries are working toward now and officially began in 2013.
- This BEPS practice just essentially involves these huge tech companies moving their profits to a country with lower tax jurisdictions to avoid paying taxes in the country where the profit is made.
- This BEPS practice reportedly “[costs] countries 100-240 billion USD in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue.”
What does the OECD say the BEPS project?
- According to the OECD, the heart of the problem is to determine “whether international income tax rules, developed … more than a century ago, remain fit for purpose in the modern global economy.”
- With that, the OECD’s action plan includes 140 countries and jurisdictions joining together to create what the OECD is calling the “Two-Pillar Solution.” Members of the initiative include the United States and China.
- The first pillar is sort of a fix to the DST problem. It will ensure that money earned within a country by companies outside of that country will be appropriately taxed in the country where they are earning profits.
- The second pillar would include a global minimum 15% corporate income tax for companies that operate across multiple countries.
How does this affect other countries outside of the US?
- China and the US are perhaps the most notable members of this agreement because they have some of the biggest tech companies in the world operating within their borders.
- And although the US is a member of this initiative, this hasn’t stopped them from expressing concern over possible DSTs being introduced.
- The Office of the United States Trade Representative (USTR) released a statement of concern, saying that DSTs “have been designed in ways that discriminate against U.S. companies,” said spokesman Adam Hodge.
- The US has also threatened countries that implement a DST tax with tariffs. “If Canada adopts a DST, USTR would examine all options, including under our trade agreements and domestic statutes,” said the USTR in a statement.
- Even though this is the case, Canada has not only continued to move forward but has accelerated its DST plans. “Our government put down a marker saying we’re going ahead with this — and not only are we going ahead, but now here’s the draft legislation to how we’re going to go ahead,” said Mark Agnew, a senior vice president at the Canadian Chamber of Commerce.
Why are smaller countries pointing at the US?
- It’s not just Canada that has expressed concern about the US benefiting and profiting from smaller countries. Ireland expressed concern after joining in on the OECD deal.
- When Ireland joined the deal, Ireland’s deputy prime minister Leo Varadkar visited the country’s House of Representatives and said that the country needed to defend its national interest against larger countries like the US.
- “The impact of tax evasion and avoidance in poorer countries can be far harsher,” said Sorley McCaughey, head of advocacy and policy at Christian Aid Ireland. “Even a few million dollars, let alone the billions that seem to be involved, can make the difference between life and death, and the lack of government funds for investment holds back economic development and maintains the dependency on aid.”
- The OECD wants its two-pillar plan on international tax reform to be effective and operational by 2023.
- And it seems as if even though the US is threatening countries that implement their own DSTs with tariffs, Canada still insists on pushing through.
- In mid-December, Canadian Finance Minister Chrystia Freeland proposed a law on the previously announced 3% tax that would apply to revenue earned by large tech companies generated with Canadian users’ help.
- But it was also said that the Canadian government wouldn’t apply the tax until 2024, and this is only if the OECD’s BEPs project hasn’t been implemented by then.