Countries Push Digital Taxes on Tech Giants
Countries Push Digital Taxes on Tech Giants
Europe’s proposal to impose a new tax on companies like
Facebook and Google is inspiring governments in Asia and Latin America
By Timothy W. Martin and Sam Schechner Oct. 28, 2018
12:00 p.m. ET
Dozens of countries are stepping up efforts to levy new
taxes on technology giants such as Alphabet Inc. and Facebook Inc., hoping to
capture revenue from digital services as economic activity increasingly shifts
online.
Inspired by European Union proposals to impose a tax
based on the revenue of tech companies rather than their profit, South Korea,
India and at least seven other Asian-Pacific countries are exploring new taxes.
Mexico, Chile and other Latin American countries too are contemplating new taxes
aimed at boosting receipts from foreign tech firms.
Such taxes, which are separate from corporate income
taxes many companies already pay, are broadly known as digital taxes and could
add billions of dollars to companies’ tax bills. They seek to impose levies on
digital services sold by global companies in a given country from units based
outside that country. In some cases, the proposed taxes target services
involving the collection of data about local residents, such as targeted online
advertising.
“Countries across the planet now understand they must
impose a digital tax,” said Bruno Le Maire, France’s finance minister, who is
lobbying across Europe for the tax ahead of a meeting of EU finance ministers
in November. “It is a question of fairness.”
In Europe, where the digital tax has run into opposition,
some countries have signaled they are prepared to act unilaterally. U.K.
Treasury chief Philip Hammond, who is set to make his annual budget statement
on Monday, said earlier this month that his country is prepared to “go it alone
with a digital services tax.”
The efforts in Asia, the U.K. and Latin America make it
likelier that several different taxes will go on the books, even if the
European proposal faces a political fight. Europe is the largest overseas
market for many tech firms, and the EU estimates that its proposal would bring
in about EUR5 billion ($5.7 billion) annually. But digital taxes could
eventually take a bigger bite in Asia, where growth is faster and there are
many more internet users.
“If we put this matter aside, I think the nation will be
losing revenue,” said Datuk Amiruddin Hamzah, Malaysia’s deputy finance
minister, at a recent event. Malaysia is considering adding digital taxes for
its 2019 budget speech on Nov. 2.
Opponents of digital taxes, which include lobbyists for
multinationals and countries with big exports, say a patchwork of new rules
that vary by country will hurt smaller firms. They say the initiatives could
lead to double taxation of corporate profits that will stifle international
trade and discourage investment.
Far-Flung Revenue
The biggest U.S. tech companies often bring in most of
their revenue overseas, leading other countries to explore taxing their revenue
instead of profit.
The tech industry opposes the proposals. On Friday, the
Information Technology Industry Council, a Washington, D.C.-based lobby group
that represents tech firms including Google and Facebook, warned that the
digital tax “poses a real and significant threat to companies in all sectors,”
citing the potential for double taxation.
Google and Facebook declined to comment on the proposals.
At the heart of the debate is the question of where tech
giants should pay their taxes.
Under international tax principles, income is taxed where
value is created. For tech companies, that is not always clear. Services
including advertising and taxi reservations are now often delivered digitally
from halfway around the world, by companies that pay little income tax locally.
U.S. tech companies often report little profit, and
therefore pay little income tax, in the overseas countries where they sell
their digital services. That is because customers in those countries are
actually buying from a unit based elsewhere, often a low-tax country. The
in-country unit is tasked with marketing and support, and the overseas unit
that actually makes sales reimburses the local unit for expenses, leaving
little taxable profit.
Under growing political pressure, some tech firms,
including Amazon.com Inc., Facebook and Google, have recently started declaring
more revenue in countries where they do business. But they also declare more
expenses locally, which could offset much of that additional revenue.
The EU’s proposal for boosting its tax receipts is to
create a tax on the digital revenue of very large companies from customers
within the region’s borders, in addition to the traditional tax on their
after-expense profits. Under the current proposal, the tax would stay in effect
until there is a global deal on how to address the digital economy.
But the EU measure needs unanimous approval from member
states to pass, and several countries remain opposed, including Ireland, where
many tech giants have their EU headquarters, in part because of the country’s
favorable tax rate.
The proposals put pressure on big countries including the
U.S.--which last year imposed a new minimum tax on American multinationals’
overseas profits -- to arrive at an agreement about how to tax the digital
economy. The Organization for Economic Cooperation and Development, a forum of
wealthy countries, has been leading international talks with the goal of
reaching a consensus by 2020.
Pascal Saint-Amans, the head of the group’s tax-policy
center, said the proposals create an incentive to move more quickly. “We
understand there has been some frustration, and there is a political urgency,”
he said. “We cannot ignore it.”
On Thursday, Treasury Secretary Steven Mnuchin expressed
concern over “unilateral and unfair” tax proposals aimed at U.S. tech companies
and urged his overseas counterparts to work within the OECD on a global plan.
In South Korea, however, lawmakers are holding committee
meetings through next week to decide whether to impose a new digital tax.
Lawmakers estimate foreign tech giants generated as much as 5 trillion South
Korean won ($4.4 billion) in sales in the country last year but paid less than
100 million won in taxes -- less than one quarter what they would have paid if
they were a domestic company, they say.
“The EU became the reference point for a lot of Asian
countries, and we have been able to follow their lead,” said Pang Hyo-chang, a
information-technology professor who wrote a report on digital taxes used by
South Korean lawmakers.
—Andrea Thomas in Berlin contributed to this article.
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