To Fund Emergency Measures, Tax Collectors Tap Tech
Two headlines last week illustrate a problematic development in the ongoing economic crisis: nations looking to underwrite their emergency economic interventions are turning to “digital” taxes on U.S. tech companies.
On the same day that the French government announced plans to shore up the French tourism sector by entering the online travel market with a publicly-backed challenger to AirBnB, it made clear its intention to impose controversial taxes on U.S. digital services in 2020, notwithstanding ongoing multilateral talks about modernizing global tax rules.
France’s planned foray into the digital travel market is part of a “government-led stimulus package to revive tourism,” which has fallen during the pandemic. Why is a publicly backed Internet service the solution? As one French official explained, the French tourism sector “has been very much de-intermediated by the large U.S. platforms, Airbnb, Booking.com,” and said that there is a need for them to “regain that link with clients.”
How might France finance such a venture? On the same day the project was announced, the French Finance Minister Bruno Le Maire committed to increasing taxes on U.S. digital exports. In speaking with reporters, Le Maire stated “[n]ever has a digital tax been more legitimate and more necessary,” due to technology companies “doing better than most during the coronavirus crisis.” (This, of course, overlooks the reality that all travel platforms, including U.S. services, are suffering from decreased tourism.)
Fair taxation of all businesses is an important policy goal, and an adequate tax base is crucial to supporting an effective government response to a public crisis. But imposing a unilateral tax, selectively gerrymandered to target non-resident companies would distort taxation regimes in questionable ways. In fact, the European Union Member States have previously rejected a French-led EU-wide digital tax aimed at U.S. companies worrying that it could trigger U.S. trade retaliation.
France is not the only country planning to fund economic recovery with taxes on U.S. exports. Indonesia just imposed a new tax on non-resident digital services including streaming services, applications, and digital games as part of emergency measures regarding the coronavirus crisis. The tax is expected to apply to a number of U.S. services such as Netflix operating in the market. The justification for the tax was to “make sure the government captures the shift in people’s consumption patterns as they stay at home during a lockdown to curb the spread of the virus.”
Despite walking away from its own digital services tax last year, in April the Polish government proposed a 1.5% revenue tax on online streaming services to fund response packages, and a Spanish digital services tax will come into force at the end of the year. Just today, France and Germany unveiled a joint proposal for an European “Recovery Fund”, citing digital taxation as a priority. (Domestic interests in the United Kingdom have also recommended funding economy recovery by tripling the pending 2% digital services tax.)
These attempts may backfire. As noted by an article by the Tax Foundation:
The temptation to apply special taxes to digital firms right now when they may be more profitable than the rest of the global economy will be strong. Over the course of time, broad-based, neutral policies should be the tools of choice for taxation. A tax base that relies too heavily on a particular sector could be left standing in the cold when the economic winds shift. . . .Though politicians may spend their efforts on narrow, distortive policies, what will be critical to an economic turnaround are policies that are designed to support growth and investment.
There is some hope for a rational update to global tax laws. The business community has been largely supportive of global tax reform talks at the Organisation for Economic Cooperation and Development (OECD). These talks are aimed at a multilateral solution to appropriate taxation across the digitized and non-digital economy.
The OECD process is charged with delivering a solution that, per prior OECD conclusions, does not “ring-fence the digital economy.” A successful outcome at the OECD would result in a global agreement that modernizes tax laws without singling out the technology sector, or U.S. companies.
Threading this needle at the multilateral level will provide policymakers and businesses needed tax certainty, as well as stability in the global trade system. It would also provide a welcome alternative to local tax collectors’ revenue grabs intended to underwrite government-run competitors to successful U.S. companies.