A case for taxing digital economy

The imposition of a 2 percent digital tax by India and the United Kingdom on digital multinational companies such as Google, Facebook, Amazon and eBay from April 1 has brought to the fore the digital tax issue that has been in the spotlight in recent years.

In July 2017, the Parliament of France passed a bill planning to levy a 3 percent digital tax on the turnover of large internet companies based in France. However, the move drew opposition from the United States, with the Donald Trump administration launching a Section 301 investigation and imposing punitive tariffs on French imports as a countermeasure.

India, some European and other countries have actively promoted digital tax in recent years following two developments. First, the countries have realized that an internet business model not limited by geographical boundaries has had a growing impact on the established tax revenue collection.

For example, the internet sector, dominated by the advertising and service industries, relies heavily on user data, the value of which is not considered during taxation. In other words, while local users participate in the digital economy and contribute to crucial data resources, local governments have a hard time taxing the digital enterprises for this under the traditional tax system, greatly reducing the tax payable for digital businesses.

Second, digital multinationals can redistribute their global profits through intangible assets trading such as intellectual property among associated companies, and thus realize "legitimate" arbitrage of the different tax systems among countries on a large scale. This is apparent from the fact that some internet giants have been shifting profits through subsidiaries in low-tax countries.

So, it is not strange that taxing digital companies has become a public policy topic. However, separate digital tax policies in countries may not only constitute a trade barrier for the global digital economy, but also lead to double taxation, placing heavy burden on big digital companies. Given that most digital multinationals are US companies, digital taxes may be seen as discriminatory policies against US companies, inviting US retaliation.

The Organization for Economic Cooperation and Development and G20 members are making steady progress toward arriving at an agreement on the digital tax issue. However, the determination of the minimum tax rate varies widely among countries, and the political and economic environment of different countries also makes it difficult to reach an agreement.

The challenge in achieving a global consensus on digital taxes is not just to forge solutions. The long-established differences in tax systems among countries, as well as the potential losses that global digital taxes can bring to specific countries, pose a bigger challenge for policymakers to consider.