Across the globe, governments are realizing that outdated approaches -- from trade agreements to privacy guidelines – no longer address the needs of the modern economy.
In response, many are quickly moving to update policies to better address today’s digital reality. But in some cases, this haste can lead to serious, unintended consequences that could cause more harm than good.
In that vein, international tax norms could be fundamentally disrupted in the final months of 2018. Conversations are ongoing in capitals around the world about how taxes are applied to digital commerce. What happens next and how this unfolds should matter to all stakeholders—governments, business and, individuals.
Brussels is at the epicenter of this unfolding global tax conversation. Earlier this year, the European Commission proposed a Digital Services Tax (DST), which would apply a 3 percent tax on revenues from certain digital activities. The European Council is looking to finalize negotiations to implement the policy by the end of 2018. The European Union (EU) isn’t alone; similar conversations are popping up in markets around the world from the United Kingdom to Chile.
The notion of taxing digital business is not new. It has been on the agenda at the G20 for years with the leading economies of the world agreeing to examine and address these issues collectively through the Organisation for Economic Co-operation and Development (OECD). This workflow is ongoing with a final report due in 2020.
While this work continues in earnest, the last year has been defined by impatience and skepticism about the OECD process. Governments on both sides of the Atlantic are concerned about the pace of the work, the United States’ commitment to the OECD process, and the OECD’s effectiveness in addressing emerging critical tax policy issues.
It is clear these sentiments have become a driving force behind the consideration of a contagion of short-term, unilateral, and misguided policies. The EU DST and other similar efforts depart from tax norms, potentially discriminating against businesses across the globe. Should a digital tax move forward, it would set a dangerous precedent, lead to double taxation, pose undue harm on certain growing and low-margin businesses, and raise potential violations with standing international tax treaties and trade commitments. These points have been made by the Peterson Institute for International Economics, Copenhagen Economics, among others.
It is important to recognize that the OECD has been impactful in successfully presenting tax solutions for its members to adopt. The Base-Erosion and Profit-Shifting project led to massive changes in cross-border taxation, including many policies in the recent U.S. tax reform. Fortunately, the U.S. is supportive of the OECD workflow. Just this week, U.S. Treasury Secretary Mnuchin reiterated the United States’ commitment to this project.
The OECD is now more critical than ever. The energies being directed at ill-conceived, short term policies are better directed towards a multilateral conversation.