TWN Info Service on WTO and Trade Issues (Oct19/08)
11 October 2019
Third World Network

OECD tax proposal exposes "double standards" on digital trade
Published in SUNS #8995 dated 11 October 2019

Geneva, 10 Oct (D. Ravi Kanth) - A proposal on Wednesday (9 October) by the Paris-based Organization for Economic Cooperation and Development (OECD) to advance international negotiations for taxing global digital companies has exposed the "double-standards" adopted by developed countries on global digital trade, said a trade negotiator who asked not to be quoted.

The developed countries led by the US, the EU, Japan, and Australia among others have repeatedly rejected calls to engage in any discussion to re-consider the moratorium for not levying customs duties on electronic transmissions at the WTO, despite persuasive evidence provided by South Africa and India about the negative fiscal and digital-industrialization implications, the negotiator said.

But the US and other developed countries stand ready to negotiate a possible taxation framework for levying taxes on digital platforms at the OECD, the negotiator noted.

The United States, European Union, Australia, Canada, New Zealand, Norway, and Switzerland among others, all members of the OECD, seem to have given the green-light to the OECD Secretariat to go ahead with its proposal on taxing global digital companies.

The OECD secretariat's proposal "brings together common elements of three competing proposals from member countries of the OECD/G20 Inclusive Framework on BEPS [Base Erosion and Profit Shifting] which groups 134 countries and jurisdictions on an equal footing for multilateral negotiation of international tax rules, making them fit for purpose for the global economy of the 21st Century."

In a press release issued on 9 October, the OECD claimed that the new proposal - which will be open to public consultation - would "re-allocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs (multi-national enterprises) have their markets."

[The OECD term "MNEs" are in fact Transnational Corporations (TNCs), that is, enterprises mainly or wholly- owned, controlled and located in a home country, but operating globally. SUNS]

The OECD maintained that the new proposal "would ensure that MNEs conducting significant business in places where they do not have a physical presence be taxed in such jurisdictions, through the creation of new rules stating (1) where tax should be paid ("nexus" rules) and (2) on what portion of profits they should be taxed ("profit allocation" rules)."

"We're making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020," said Angel Gurria, the OECD's Secretary-General.

He said "this plan [the OECD's proposal] brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all MNEs pay their fair share."

Gurria warned that if OECD members fail "to reach agreement by 2020, [it] would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy."

"We must not allow that to happen," the OECD head insisted.

The 31-member OECD is a rich country economic club for policy-making. It was established in 1961, on the initiative of the US.

Earlier, it had worked hard on a Multilateral Investment Agreement (MIA) that was rejected by several countries and the international Civil Society.

The MIA has now re-surfaced in a watered-down proposal at the informal plurilateral Joint Statement Initiative (JSI) group at the WTO.

Recently, members of the JSI group on investment facilitation circulated a draft text on what would be the provisions of an MIA at the WTO.

On the OECD's proposal on "the Inclusive Framework's tax work on the digitalisation of the economy," Gurria claimed that "it is part of wider efforts to restore stability and certainty in the international tax system, address possible overlaps with existing rules and mitigate the risks of double taxation."

"Beyond the specific elements on reallocating taxing rights, a second pillar of the work aims to resolve remaining BEPS issues, ensuring a minimum corporate income tax on MNE profits," the OECD said.

According to a report in the Wall Street Journal on 9 October, the OECD's new proposal will target not "just technology companies that are predominantly American, but would also affect makers of such products as luxury goods and automobiles that are based in Europe and other countries."

Further, "the new rules also would give more taxing powers to countries in which consumers are based, rather than where patents, licenses and brands are owned or where businesses have headquarters," the WSJ said.

More important, "central to the corporate-tax issue is the growing digitalization of the global economy," the WSJ stated, arguing that "decades ago, overseas sales and profit involved mostly physical goods [and] digital services are less tied to local presence, enabling tech companies to lower their tax bills by basing patents, licenses and trademarks - to which profits are attributed - in low-tax countries," the WSJ said.

"There will be massive unilateral measures if we don't find a solution," said Pascal Saint-Amans, the OECD's senior tax official.

In contrast to the support lent to the OECD's proposal by its member countries as well as the technology-giants such as Amazon, the US has fiercely opposed a joint proposal by South Africa and India at the WTO to reconsider the current moratorium for not levying customs duties on electronic transmissions.

At the informal WTO General Council (GC) meeting held on 1 October to discuss the joint proposal from South Africa and India, the US flatly refused to engage in any discussion, according to trade envoys, who asked not to be quoted.

Despite the "asymmetrical" effects for developing countries, arising from the current WTO moratorium on electronic transmissions, the US and other developed countries have refused to engage in any discussion.

The UNCTAD TDR of 2019 vividly brought out the negative fiscal implications of the moratorium on electronic transmissions.

While the Brussels-based European Centre for Political Economy (ECIPE) as well as the Paris-based International Chamber of Commerce have called for continuing with the moratorium on electronic transmissions, UNCTAD in TDR-2019 challenged the grounds on which the moratorium can be continued.

The digital trade policy proposals of the US and other developed countries are largely based on the provisions that were set out in the failed Trans-Pacific Partnership (TPP) Agreement.

"Agreeing to a permanent ban on customs duties on ET would foreclose a future source of public revenue for economies of the global South as the share of electronically transmitted additive manufacturing products in global trade increases over time," the South African trade envoy Ambassador Xolelwa Mlumbi-Peter has pointed out. (See SUNS #8989 dated 3 October 2019).

She said that "some WTO members are exploring mechanisms of imposing customs duties, including preserving policy space to do so in the context of a digital industrial policy."

In short, "the decision on desirability of imposing customs duties should therefore rest with sovereign governments as a policy tool for their own development," Ambassador Xolelwa emphasized.

She said "while there are benefits to digital trade, its gains are not automatic and the digital economy also presents immense challenges for developing countries in the context of the digital divide."

"Owing to the concentration of digital technologies mainly in developed countries and the skills biased nature of digitalization, digital trade, if not consciously pursued in an inclusive manner, risks increasing inequality and further marginalization of developing countries in global trade," she warned.

"Furthermore, the digital divide is rooted in structural and historical imbalances in the global economy which must be addressed to ensure no one is left behind," the South African envoy maintained.

India offered a searing critique on what it called a flawed ECIPE study at the informal GC meeting.

India warned about the dangerous implications of the ECIPE study, which it said, is based on a "specific type of Computable General Equilibrium (CGE) model," while "the analysis applies [to] "imaginary" and "arbitrary" tariffs on four broad services sectors and presents the results as economic impact of removal of the moratorium."

"I say "imaginary" and "arbitrary" tariffs as the application of tariffs on service sectors were so far never ever conceptualized in the world of Services or under the GATS!," the Indian trade envoy Ambassador JS Deepak emphasized.

"We believe it is very dangerous to identify services as ET because that will take away the GATS flexibilities associated with (trade in) services," Ambassador Deepak told members at the informal GC meeting.

"Moratorium on customs duties on ET may encourage developed countries to identify more and more services as ET which will take away the right of developing countries to regulate the imports of these services," the Indian trade envoy warned.

In short, the US and other developed countries stand exposed in their "double-standards" by agreeing to a discussion at the OECD in Paris while refusing to engage in a discussion on the WTO moratorium on e-commerce duties at the WTO, the negotiator said.