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Looking Ahead in the Global Digital Services Tax Debate

This week action occurred in France that received little notice. On Monday, the Assemblée Nationale passed digital services tax legislation that would apply a three percent tax on revenues derived from certain digital services, such as advertising. This action set in motion expedited consideration by the French Sénat. Passage and adoption of this controversial tax looks likely.

France has discussed pursuing such a measure for years. Initially it focused on Brussels, where France led an effort to enact a digital services tax that would have applied across the European Union. Such an approach would require unanimity across the Member State governments, which, after months of intense debate, could not be reached. Even before the fate of the digital tax effort was known in Brussels, France made clear that it would proceed with its own initiative should the EU-wide measure falter.

France’s decision to act unilaterally is consequential for a number of reasons. Most significantly, it occurs against the backdrop of a promising and progressing multilateral effort at the Organisation for Economic Co-operation and Development (OECD) to address cross-border tax issues created by the increasing digitalization of the global economy. Specifically, many countries are concerned that profits derived from digital commerce are under-allocated to their jurisdictions. Further, many feel companies use the current system to their benefit at the expense of markets where they derive such profits.

The current OECD negotiations stem from the multi-year Base Erosion and Profit-Shifting (BEPS) project, which started in 2013 and has led to dramatic global reforms of international tax law. A wide array of countries, from the United States with the Tax Cuts and Jobs Act (TCJA), to Europe with the Anti-Tax Avoidance Directive (ATAD), and jurisdictions elsewhere, have adopted new tax rules in response to the BEPS recommendations. Many of these rules go beyond the BEPS minimum standards.

As a further part of the BEPS process, participants committed to work through issues stemming from digitalization, with recommendations due in 2020. These negotiations have intensified this year, which was reflected by the OECD’s widely attended Public Consultation in March, which presented a number of approaches to profit reallocation in addition to proposals for further action on base erosion for debate. ITI participated in the consultation and offered comments. France’s move to enact a national measure undermines the work towards a global solution that the more than 100 countries participating in the BEPS process committed to, inviting the kind of policy fragmentation that reduces business certainty and impedes innovation, job creation, and economic growth.

Indeed, Austria, Spain, Italy, and (most recently) Mexico have also announced that they are considering adopting national digital tax measures. These efforts are in various stages of design and progression, but it is clear that each initiative looks likely to be a bit different than the last, targeting different digital activities and creating new implementation schemes that would vary from market to market. What they all have in common, more or less, is that they include global and local revenue thresholds that would disproportionately apply to large technology firms not established within these countries’ borders.

The need for a multilateral solution has drawn increasing affirmations from other stakeholders, including France itself, Germany, the Netherlands, and Canada to name but a few. The United States is also ‘all in’ as suggested most recently in a bipartisan statement from key tax policymakers in the U.S. Congress.

The global business community has its own concerns. Approaches that depart from shared, longstanding approaches to international tax policy – such as these various countries’ national digital tax proposals do – undermine key principles of taxation, such as a commitment to avoiding double taxation.

ITI is committed to a productive, multilateral dialogue at the OECD. We recognize the challenges inherent in such a project, given the varying economic realities of participants. Common divisions remain between developed and developing nations, import and export economies, etc. However, it is worth the tremendous effort that will be required to achieve consensus on thoughtful and principled modifications of international tax norms, especially as the global economy becomes increasingly digitized.

We stand at a fork in the road where countries can work together to address issues jointly or pursue individual policies that could lead us down a pathway to a fragmented, inefficient global tax system – as is the case for this week’s action in France. We encourage all governments to recommit to the former and solve this challenge through a collaborative, consensus-based approach.

Public Policy Tags: Tax Policy