TWN Info Service on Finance and Development (Oct21/06)
26 October 2021
Third World Network

Developing countries to lose from digital services tax of OECD
Published in SUNS #9444 dated 25 October 2021

Geneva, 22 Oct (D. Ravi Kanth) – The United States has announced an agreement with five European countries on a controversial trade dispute concerning the digital services tax imposed on hundreds of billions of dollars of revenue generated by the digital behemoths Google, Amazon, Facebook, and Apple, also known as GAFA, that could have serious implications for developing countries, said people familiar with the development.

The so-called GAFA as well as Microsoft engage in digital exports worth $517 billion annually, accounting for more than half of the US total services exports, according to a report in the Wall Street Journal of 2 June 2021.

On 21 October, the US Trade Representative (USTR) Ambassador Katherine Tai announced that the US has reached an agreement with Austria, France, Italy, Spain, and the United Kingdom concerning the treatment of Digital Services Taxes (DSTs) during the interim period prior to an agreement being negotiated at the Paris-based Organization for Economic Cooperation and Development (OECD).

Following the latest agreement, the US will terminate its currently imposed retaliatory tariffs by the Trump administration in 2019 under Section 301 of the Trade Act of 1974, and later continued by the Biden administration till an agreement is negotiated among the OECD members.

The US and the European countries seem determined to foist the OECD agreement, when it is concluded, as a “take-it-or-leave-it” agreement on other countries that are not members of the OECD.

“We reached our agreement on DSTs in conjunction with the historic OECD global agreement that will help end the race to the bottom over multinational corporate taxation by leveling the corporate tax field,” said the USTR, in a press statement released on 21 October.

Ambassador Tai said “in coordination with the (US) Treasury, we will work together with these governments to ensure implementation of the agreement and roll back existing DSTs when Pillar I (of the OECD agreement) enters into effect” by 2023.

More importantly, she warned that the US “will also continue to oppose the implementation of unilateral digital services taxes by other trading partners,” like India and Turkey, which apparently refused to join the OECD- conducted negotiations.

Also, the USTR would likely be targeting Indonesia and Malaysia which have already imposed digital services taxes on foreign internet companies.

According to the USTR’s press statement, “under the Agreement, in defined circumstances, DST liability that US companies accrue during the interim period will be creditable against future income taxes accrued under Pillar 1 under the OECD agreement.”

It implies that the DSTs currently proposed/imposed by the five European countries will be stopped and they will refrain from imposing new measures until the OECD agreement is concluded.

In return, the United States will terminate the currently-suspended additional duties imposed on goods coming from Austria, France, Italy, Spain, and the United Kingdom that had been adopted during the Section 301 investigations on the DST.

The USTR said the US “is proceeding with the formal steps required for terminating the Section 301 trade actions, and in coordination with the Treasury, will monitor implementation of the agreement going forward.”

“Turkey and India, the other two countries covered by the DST investigations, have not joined in the agreement,” the USTR’s statement has suggested.

The USTR appears to have warned India and Turkey that their refusal to join the OECD negotiations could result in additional tariffs being imposed on them under Section 301.

Many developing countries, who are facing an extreme resource crunch due to the COVID-19 pandemic, are now seriously considering taxing the Big Tech platforms that are making hundreds of billions of dollars of revenue annually without paying any taxes.

The tech companies, according to media reports, want international changes to tax laws, rather than being subject to a patchwork of national taxes.

In effect, the tech companies want a harmonized global tax arrangement rather than taxes decided by individual sovereign governments.

Given the negotiating clout that the US exercises in the OECD, it could be possible that Washington will try hard for a minimal global tax arrangement, as it did on the global corporate tax recently.

Following years of intensive negotiations, major reform of the international tax system was finalized earlier this month at the OECD which ensures that Multinational Enterprises (MNEs) will be subject to a minimum tax rate of 15% from 2023.

“The moratorium rate of 15% is far too low, especially when many developing countries have statutory corporate income tax rates (in the ranges of between 25-35%), with effective tax rates that are higher,” a digital trade analyst said.

“To be genuinely effective in deterring profit-shifting to tax havens, the rate should have been between 20-25% as was demanded by various countries,” according to a report issued by the South Centre recently, the analyst said.

The digital services tax is also an area of discussion in the informal plurilateral Joint Statement Initiative (JSI) discussions on digital trade.

In the revised draft text issued by the JSI coordinators, Japan has proposed a placeholder on taxation.

On a separate issue concerning the moratorium on customs duties on electronic transmissions, it remains to be seen what will be the final decision that would be taken at the World Trade Organization’s 12th ministerial conference (MC12), scheduled to take place in Geneva from 30 November.

India and South Africa as well as several other developing countries are seeking a review of the current moratorium because of its huge effect on the fiscal revenues of developing countries.

“Clarity on the scope of the moratorium has been demanded by these countries, but with little success,” the analyst said.

According to an estimate by the UN Conference on Trade and Development (UNCTAD), the developing countries suffer an annual revenue loss of billions of dollars, which has increased further during the exponential rise in their imports of digitized products like video games, movies and music, during the COVID-19 pandemic.

“The loss of revenue for industrialized countries remains miniscule as they are the net exporters of these products with near zero tariffs on these products,” the analyst said.