Info Service on Finance and Development (Aug20/01)
rules in FTAs may undermine capacity to tax digital firms
Geneva, 13 Aug (D. Ravi Kanth) – Despite the global economy being mired in an economic recession due to the worsening Covid-19 pandemic, five US tech giants – Google, Amazon, Facebook, Apple, and Microsoft – have continued to generate profits running into tens of billions of dollars.
Amazon, for example, has witnessed almost a 100% increase in its net income in the first quarter of 2020 as compared to 2019. Further, the company’s overall sales skyrocketed to $88.9 billion, with a 40% year-over-year growth in its second fiscal quarter which ended in June 2020.
During the US Congressional hearings on 29 July, Congressman David Cicilline, the chair of the sub-committee looking into anti-competitive practices by the tech giants, concluded that “these companies (Google, Amazon, Facebook, Apple and Microsoft) as exist today, have monopoly power” and “all need to be properly regulated and held accountable.”
The Congressional hearings came days after the super-profit of $13 billion in a single day was reported by Amazon.
The committee’s hearings showed that the five American tech giants have accumulated so much financial and political power, making them “the emperors” of the online economy.
That these companies are beyond the reach of any minimal regulation, or taxation by national governments, is by now well established.
Yet, the United States Trade Representative (USTR) continues to threaten countries that plan to impose a modest tax on these companies.
The Trump administration has threatened to slap retaliatory measures worth billions of dollars on France and other countries if they go ahead with their plans to impose a modest tax on the American tech companies that are generating tens of billions of dollars in profits from their operations without paying any taxes.
The French finance minister, Bruno Le Maire, denounced the move as “a provocation,” according to a report in the New York Times on 17 June.
Subsequently, also in June, the US Treasury Secretary Steven Mnuchin informed the European finance ministers to suspend talks at the Paris-based Organization for Economic Cooperation and Development (OECD) on taxing the tech giants.
The US administration has suspended international tax negotiations with the European countries at the OECD.
The USTR Ambassador Robert Lighthizer defended his administration’s actions at the hearings of the US Ways and Means Committee against countries that are proceeding to impose taxes on American tech giants.
“The reality was, they all came together and agreed that they’d screw America, and that’s just not something that we’re ever going to be a part of,” Ambassador Lighthizer declared. “I don’t want tax systems that unfairly treat American companies,” the USTR warned.
At the World Trade Organization’s dedicated General Council (GC) meeting on 14 July on the moratorium on customs duties on e-commerce, the developing countries led by South Africa and India among others delivered a strong message that the time has come for a “rethink” on the moratorium on customs duties on e-commerce given the loss of more than $10 billion in revenue.
The industrialized countries, including the US, admitted that there would be a revenue impact for developing and least developed countries but maintained that the impact of the revenue loss is insignificant, if the loss of revenue were to be measured on the basis of applied customs tariffs instead of bound duties.
Little wonder that the growing concentration of rents in the hands of a few digital firms and dwindling incomes of the governments, mostly of the developing countries, are critically falling behind the targets set for the achievement of the United Nations Sustainable Development Goals (SDGs).
With the growing socio-economic demands and falling fiscal revenues, governments urgently need additional sources of finance. Surely, taxing the digital firms can be an important way forward which will ensure equity and inclusive growth in the post-pandemic digital age.
But the digital rules which are being negotiated in various FTAs may seriously undermine the governments’ capacity to tax these digital firms.
HOW DIGITAL TRADE RULES WOULD IMPEDE TAXATION OF DIGITAL ECONOMY
It is in this context, that four authors in their book on “How “Digital Trade” Rules Would Impede Taxation of the Digitalised Economy in the Global South” have provided important insights for policymakers, trade negotiators, tax authorities and other stakeholders.
The 144-page book, written by Jane Kelsey, John Bush, Manuel Montes and Joy Ndubai, and published by the Third World Network, has provided a detailed account of the numerous issues involved in the taxation debate.
The authors come from academia and international policy backgrounds. Ms Jane Kelsey is a Professor of Law at the University of Auckland, New Zealand, where she specializes in international economic regulation, while Mr John N Bush is an adviser in private sector development and assists governments in preparing laws and procedures to support the establishment, growth, and long-term financial viability of enterprises in developing countries.
Mr Manuel Montes is a Senior Adviser of the Society for International Development and previously worked as Permanent Observer to the UN and Senior Adviser on Finance and Development at the South Centre while Ms Joy Waruguru Ndubai is currently pursuing a Doctorate in Law at Vienna University.
The authors have divided their book into seven parts.
Part 1 of the book has identified the major challenges that the digital revolution poses for public finance and tax authorities, especially in the Global South, and for achieving the SDGs.
Part 2 has discussed the most relevant and proposed trade rules that affect the taxation of the digitalized economy.
Part 3 has provided an illuminating analysis of the implications for national tax revenue, digital development and the policy space of developing countries if the temporary moratorium on customs duties on electronic transmissions became permanent.
Part 4 has examined the initiatives towards more effective corporate income tax of digital companies that are being developed at the OECD under the Inclusive Framework, and proposed by the G24, and how they would interact with digital trade rules.
Part 5 has discussed the development of digital services taxes, including the US’s arguments against France’s version of the tax, moves to apply value-added taxes to cross-border digital transactions, and moves in several countries to cap royalty payments used as a means of profit shifting by transnational digital companies. Each of these is assessed against the trade rules.
Part 6 has analyzed the extent to which moves to ensure that governments can access critical information and require disclosure may be constrained by existing and proposed trade rules. This includes a review of the only WTO dispute that has judged contemporary taxation measures against the obligations and exceptions in the General Agreement on Trade in Services (GATS), in which Panama challenged restrictions imposed by Argentina on grounds of non-cooperation in the disclosure of tax-related information.
And, the final Part 7 has identified the main sources of leverage that MNEs (multinational enterprises) and their parent states, especially the US, use to influence the decisions of other governments on taxing the digitalized economy, and the potential chilling effect that may have on regulatory decisions. This discussion includes unilateral investigations by the US under Section 301 of the Trade Act 1974, as well as trade rules on “transparency” that aim to ensure they are consulted when countries are developing digital tax measures that might affect them.
The authors have cautioned against the adoption of trade rules that will undermine developing countries’ digital development, tax justice and progress towards the SDGs.
Several trade rules identified in the chapters on electronic commerce in the trade agreements are: unrestricted cross-border transfer of information related to business and prohibitions on requirements to hold data locally; the right to use servers and other computing facilities located in any country, and no requirements to use local computing facilities, including servers; non-disclosure of source codes and algorithms; prevent requirements for offshore service providers to have a local presence or take a particular legal form if they have a presence, and “reasonable, objective and impartial” administration of laws of general application; and a permanent moratorium on levying customs duties on electronic transmissions.
The authors argued succinctly that the past decade has seen a significant expansion of trade rules which restrict governments’ capacity to regulate the digital economy and consolidate the dominance of digital platforms.
This favourable digital trade regime is now being facilitated through free trade agreements (FTAs) at the regional level and is currently being negotiated between a group of countries under the Joint Statement Initiative (JSI).
The US and its allies in the JSI on e-commerce have already called for a permanent moratorium on customs duties on electronic transmissions. Attempts are now underway to exclude any restrictions on e-commerce services akin to the moratorium on customs duties.
Since the WTO’s tenth ministerial conference (MC10) in Nairobi, Kenya, in 2015, there has been an unprecedented push for plurilateral agreements which could later be multilateralized.
The JSI on e-commerce would have dire consequences on the digital industrialization efforts of the developing countries, making the global South forever import-dependent in digital goods.
In their book, the authors have shown how these digital trade rules will diminish the tax policy space of the developing countries and exacerbate the harmful tax practices of multinational firms, making them richer at the cost of the impoverishment of a large proportion of the population.
This can have serious long-term harmful social and economic impacts, they said.
The authors underscored the need for adopting an alternative approach to MNE taxation based on “significant economic presence” which was proposed by the G24 group of developing countries in 2019, and also supported by the African Tax Administration Forum (ATAF).
This approach would require a shift towards treating MNEs in accordance with the economic reality that they operate as unitary enterprises and allocating taxation rights using factors that reflect a balance of demand side (sales) and supply side (employees, users, physical assets).
It also highlighted that transaction-based digital services taxes (DSTs) target income or revenue from designated online activities, principally services delivered via the Internet, especially advertising; digital platform or interface services or an Internet marketplace; and the collection and exploitation of data by an Internet provider.
However, ambiguous classifications of commitments in GATS schedules add to the legal uncertainty of DSTs.
Further, proposed e-commerce rules prohibit access to source codes and algorithms that may be essential to assess liability based on the domestic share of globally integrated activities, including user-generated data. The available exceptions provide limited protection and transparency rules would empower digital corporations to lobby against such laws.
The developing countries need regional and national strategies to strengthen their domestic revenue mobilization, enhance their domestic industrial capacity, bridge the digital divide and reduce dependence on the dominant corporations.
For this, all countries and especially those from the Global South should refrain from participating in the process of digital trade negotiations that would limit their policy space, the authors warned.
An important and immediate step towards preserving their fiscal policy space, mobilizing financial resources, and promoting digital industrialization would be removal of the temporary moratorium on customs duties on electronic transmissions in the WTO.
According to the authors, “those who demand that developing countries accept a permanent ban on this tax policy option seek to lead them, handcuffed and blindfolded, into the fiscal unknown.”
The authors highlighted that trade rules aim to strengthen the lobbying power of digital corporations and their parent states in the name of “transparency”, while other trade rules assist the corporations to remain opaque and unaccountable.
Transparency provisions that are already found in the regional FTAs have been proposed in the WTO plurilateral agreements on E-commerce, Domestic Regulation and Investment Facilitation.
If adopted, the authors warned, they would further empower the tech companies and their home governments to intervene, lobby and threaten sanctions against sovereign governments like the US government investigations under Section 301 of the Trade Act 1974, over France’s Digital Services Tax.
The authors endorsed the African Group for rejecting the process of plurilateral negotiations on “electronic commerce” as premature, pushing the trade agenda too far without addressing the outstanding development issues in the Doha Round.
In a nutshell, the authors reminded the WTO Members that they are also member states of the United Nations and have committed themselves to the Sustainable Development Goals.
More so, in a post-COVID-19 environment, there is an urgent need to prioritize trade and tax policies targeting economic and social rights.
It remains the responsibility of the governments to ensure that the powerful digital MNEs genuinely contribute to achieving the Sustainable Development Goals, the authors concluded.