Countries push digital taxes on tech giants

Facebook said Oct 17 that it was reviving the pioneering MTV reality show The Real World. — AFP Relaxnews

DOZENS of countries are stepping up efforts to levy new taxes on technology giants such as Alphabet Inc. GOOGL -1.80% and Facebook Inc., FB -3.70% hoping to capture revenue from digital services as economic activity increasingly shifts online.

Inspired by European Union proposals to impose a tax based on the revenue of tech companies rather than their profit, South Korea, India and at least seven other Asian-Pacific countries are exploring new taxes. Mexico, Chile and other Latin American countries too are contemplating new taxes aimed at boosting receipts from foreign tech firms.

Such taxes, which are separate from corporate income taxes many companies already pay, are broadly known as digital taxes and could add billions of dollars to companies’ tax bills. They seek to impose levies on digital services sold by global companies in a given country from units based outside that country. In some cases, the proposed taxes target services involving the collection of data about local residents, such as targeted online advertising.

“Countries across the planet now understand they must impose a digital tax,” said Bruno Le Maire, France’s finance minister, who is lobbying across Europe for the tax ahead of a meeting of EU finance ministers in November. “It is a question of fairness.”

In Europe, where the digital tax has run into opposition, some countries have signaled they are prepared to act unilaterally. U.K. Treasury chief Philip Hammond, who is set to make his annual budget statement on Monday, said earlier this month that his country is prepared to “go it alone with a digital services tax.”

The efforts in Asia, the U.K. and Latin America make it likelier that several different taxes will go on the books, even if the European proposal faces a political fight. Europe is the largest overseas market for many tech firms, and the EU estimates that its proposal would bring in about EUR5 billion ($5.7 billion) annually. But digital taxes could eventually take a bigger bite in Asia, where growth is faster and there are many more internet users.

“If we put this matter aside, I think the nation will be losing revenue,” said Datuk Amiruddin Hamzah, Malaysia’s deputy finance minister, at a recent event. Malaysia is considering adding digital taxes for its 2019 budget speech on Nov. 2.

Opponents of digital taxes, which include lobbyists for multinationals and countries with big exports, say a patchwork of new rules that vary by country will hurt smaller firms. They say the initiatives could lead to double taxation of corporate profits that will stifle international trade and discourage investment.

The tech industry opposes the proposals. On Friday, the Information Technology Industry Council, a Washington, D.C.-based lobby group that represents tech firms including Google and Facebook, warned that the digital tax “poses a real and significant threat to companies in all sectors,” citing the potential for double taxation.

Google and Facebook declined to comment on the proposals.

At the heart of the debate is the question of where tech giants should pay their taxes.

Under international tax principles, income is taxed where value is created. For tech companies, that is not always clear. Services including advertising and taxi reservations are now often delivered digitally from halfway around the world, by companies that pay little income tax locally.

U.S. tech companies often report little profit, and therefore pay little income tax, in the overseas countries where they sell their digital services. That is because customers in those countries are actually buying from a unit based elsewhere, often a low-tax country. The in-country unit is tasked with marketing and support, and the overseas unit that actually makes sales reimburses the local unit for expenses, leaving little taxable profit.

Under growing political pressure, some tech firms, including Inc., Facebook and Google, have recently started declaring more revenue in countries where they do business. But they also declare more expenses locally, which could offset much of that additional revenue.

The EU’s proposal for boosting its tax receipts is to create a tax on the digital revenue of very large companies from customers within the region’s borders, in addition to the traditional tax on their after-expense profits. Under the current proposal, the tax would stay in effect until there is a global deal on how to address the digital economy.

But the EU measure needs unanimous approval from member states to pass, and several countries remain opposed, including Ireland, where many tech giants have their EU headquarters, in part because of the country’s favorable tax rate.

The proposals put pressure on big countries including the U.S.--which last year imposed a new minimum tax on American multinationals’ overseas profits -- to arrive at an agreement about how to tax the digital economy. The Organization for Economic Cooperation and Development, a forum of wealthy countries, has been leading international talks with the goal of reaching a consensus by 2020.

Pascal Saint-Amans, the head of the group’s tax-policy center, said the proposals create an incentive to move more quickly. “We understand there has been some frustration, and there is a political urgency,” he said. “We cannot ignore it.”

On Thursday, Treasury Secretary Steven Mnuchin expressed concern over “unilateral and unfair” tax proposals aimed at U.S. tech companies and urged his overseas counterparts to work within the OECD on a global plan.

In South Korea, however, lawmakers are holding committee meetings through next week to decide whether to impose a new digital tax. Lawmakers estimate foreign tech giants generated as much as 5 trillion South Korean won ($4.4 billion) in sales in the country last year but paid less than 100 million won in taxes -- less than one quarter what they would have paid if they were a domestic company, they say.

“The EU became the reference point for a lot of Asian countries, and we have been able to follow their lead,” said Pang Hyo-chang, a information-technology professor who wrote a report on digital taxes used by South Korean lawmakers. - WSJ

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