Why digital taxes could survive the hard-fought global deal that’s supposed to kill them off

So, now that a global deal is in sight, are digital-specific levies bound for history’s scrap heap? Don’t hold your breath.

Under U.S. pressure, the European Union may have reacted to the OECD’s July announcement of a preliminary agreement by suspending its plans to introduce an EU-wide digital services tax, but the proposal isn’t dead. There’s still furious debate over the specifics of the global tax deal, which would set a global minimum corporate tax rate of 15% and allow countries to claim some corporate tax from the companies operating on their turf. And experts warn that even if the deal does become official, it may not be enough to lure governments away from the attractions of targeting Big Tech.

“Digital services taxes have become an important piece of the overall political narrative of many dominant players in government and many political parties,” says Matthias Bauer, senior economist at the European Centre for International Political Economy (ECIPE) in Brussels.

In the EU, Bauer notes, a push to extract more tax from multinationals ended up being focused on Google, Facebook, and Amazon, “which in the eyes of many, if not most EU citizens, are considered evil.”

“I think at EU level the proposal for a DST will not disappear anytime soon,” he says, adding that the EU also needs the cash, especially after the U.K.’s exit from its club.

Then there’s the fact that some countries would not be able to claim as much tax from Big Tech under the global deal as they can with their existing digital levies.

“It seems highly likely that even if the global treaty passed, many countries would see the need to retain their DSTs,” says Alex Cobham, the chief executive of the Tax Justice Network, adding that estimates show both India and the U.K. would likely lose a great deal of tax revenue by relying on the new deal.

“Extremely narrow criteria”

Digital services taxes are imposed on the locally generated revenues of large online firms, rather than their profits. The levy is usually around 2% (as in the U.K. and India) or 3% (as in France and Spain), though Turkey’s DST is a whopping 7.5%. By contrast, the global deal that’s under discussion would allow countries to tax 20% to 30% of the very largest companies’ local profits that exceed 10% of revenues.

“Many tech companies will be outside of what are now extremely narrow criteria” for these taxing rights, says Cobham, who estimates only 100 or so multinationals, across a range of sectors, will be affected.

Neither Cobham nor Bauer is a fan of DSTs. Both note that the targeted tech giants tend to just shift the burden on to someone else. “In France, the U.K., and Spain, we saw Amazon for example directly passing on the 3% to the sellers on its platform,” says Bauer.

“Many companies [are] able to pass them on as regressive taxes to consumers,” says Cobham. “In addition, because they fall on sales rather than profits, they can be much more distortionary and are unlikely to limit damaging market concentration.”

The U.S.’s antipathy to DSTs stems from the fact that the firms they target are generally American. While this naturally follows on from the fact that American companies dominate the tech landscape, the U.S. Trade Representative’s Office (USTR) sees the taxes as discriminatory.

As a result, the USTR has announced hefty tariffs against countries that have unilaterally introduced DSTs—first France in mid-2020, then the U.K., Italy, India, Spain, Turkey, and Austria in June of this year. However, it then suspended the tariffs, saying it wanted to find a “multilateral solution to a range of key issues related to international taxation, including our concerns with digital services taxes.”

Potential impasse

As far as the U.S. is concerned, the deal announced last month by the OECD obviates the need for any digital services taxes. Since that time, Trade Representative Katherine Tai has urged Canada to drop its proposed 3% DST, and Treasury Secretary Janet Yellen successfully pushed the EU to suspend its DST plans for now.

However, while many of the countries with DSTs have expressed openness to ditching them in the light of the global tax deal, timing may be an issue.

France, for example, responded to the agreement’s announcement by saying it would legally commit to ending its digital services tax only when the deal comes into effect. That’s probably only going to happen in 2023 at the earliest—making this recalcitrance a potential hurdle for the Biden administration to get congressional approval for the global deal.

“There could potentially be a you-go-first problem,” says Adam Craggs, the head of the tax disputes team at law firm RPC. “However, if there is enough political capital behind the move in the U.S. (and elsewhere), we expect these sorts of anomalies to be ironed out in due course.”

The question is whether that political capital really is there.

“Despite the Biden administration’s enthusiasm for the deal, uncertainty over whether the proposals will make their way through the U.S. legislature presents one of the greatest threats to the proposal’s success,” says Craggs. “The Biden administration is pursuing domestic tax reform at the same time as this international project, and it is not clear that the one can survive without the other. The measures do not enjoy bipartisan support, and the Senate currently tends to divide 50/50 along party lines with the vice president holding a casting vote.”

How might a you-go-first impasse be broken? “It’s difficult to see,” says Cobham. “The U.S. and OECD will continue twisting arms, but at some point countries will balk at giving up today’s certain revenue in exchange for tomorrow’s uncertainty.”