Taxing Tech Titans: Policy Options for the Global South | IGF 2023 WS #443

Victoria Hyde

The analysis explores various perspectives on international taxation and global tax rules. One significant aspect is the commendation of the OECD Amount A Multilateral Convention for its comprehensive and inclusive approach to international taxation. The framework minimises tax arbitrage opportunities, reduces the risk of double taxation, and promotes responsible tax practices for multinational corporations. It also addresses the unique challenges posed by the digital age.

However, an alternative viewpoint emphasises the importance of tailoring tax policies to suit the economic, political, and administrative landscapes of individual countries. This approach promotes revenue generation in developing countries, addresses issues of profit shifting, tax havens, and harmful tax practices, and supports a fair redistribution of taxing rights. It aligns with SDG 8: Decent Work and Economic Growth and SDG 16: Peace, Justice, and Strong Institutions.

Regarding Digital Services Tax (DST), it is noted that several countries in Europe, as well as Malaysia, India, and Pakistan in Asia, have implemented DST in the absence of a global solution. These taxes on imported digital services vary in scope and application. The lack of a unified approach to DST has led to potential market distortions and the risk of double taxation, highlighting the need for a global solution.

The inclusive framework is recognised as a significant step forward in establishing international tax rules. The OECD has sought input from various stakeholders, including countries, industries, trade associations, and non-governmental organisations. This collaborative approach aims to achieve global consensus for fair taxation rules, in line with SDG 10: Reduced Inequalities and SDG 17: Partnerships for the Goals.

The analysis also acknowledges the validity of the delay in implementing the inclusive framework, considering its complexity and long-lasting impact. The goal is to avoid unintended consequences by incorporating stakeholders’ perspectives through an extensive and intricate process.

Stakeholder engagement emerges as a crucial factor in developing and implementing tax arrangements. Victoria Hyde emphasises the importance of engaging with stakeholders, as their concerns can significantly impact the success and effectiveness of tax systems.

Furthermore, the support for globally agreed and consistent tax rules is reinforced. Standardised global tax rules can reduce complexity and uncertainty faced by multinational entities (M&Es) due to varying tax regulations. This facilitates more transparent and predictable tax governance, simplifies compliance for M&Es, and enables them to determine their tax obligations across multiple jurisdictions more easily. These benefits align with SDG 10: Reduced Inequalities and SDG 17: Partnerships for the Goals.

The analysis concludes by addressing the risk of uncoordinated unilateral measures and retaliatory trade sanctions resulting from the absence of a global consensus-based solution. It highlights the need for a globally agreed approach to international taxation and tax rules to mitigate the potential for trade conflicts and ensure peaceful relations among nations.

Overall, the analysis highlights the multifaceted nature of international taxation and the complex considerations involved in establishing global tax rules. It emphasises the importance of inclusive and collaborative frameworks, stakeholder involvement, tailored tax policies, and globally agreed solutions to effectively address challenges and achieve desired outcomes in a fair and equitable manner.

Gayani Hurulle

Large multinational technology companies generate significant revenue from countries in the Global South, yet often operate outside the formal tax regulations of these countries. Over 60% of the world’s population are now online, with the majority residing in the Global South. These countries accounted for around 30% of Meta’s (formerly Facebook) revenue in 2022, with the remaining 70% coming from the US, Canada, and Europe.

To address this, several countries in South and Southeast Asia, including India, Pakistan, Nepal, Vietnam, and Malaysia, have implemented digital taxes. Tax rates range from 2% in India and Nepal to 10% in Pakistan. Different tax options are available, such as domestic measures like direct and indirect taxes, and treaty-based solutions like the UN’s Article 12B and the OECD/G20’s Inclusive Framework.

However, there are concerns about the OECD/G20 multilateral system. Countries that agree to the deemed ‘first best solution’ under the OECD/G20 amount A convention must limit the implementation of domestic measures until the end of 2024. The convention’s implementation depends on the US signing it, adding further uncertainty.

Moreover, the deadline for OECD convention negotiations has been repeatedly postponed, reflecting the complexity of reaching an agreement among participating countries. In the meantime, some countries have implemented low national-level taxation policies and intend to maintain them until an OECD agreement is reached.

There is also uncertainty about whether tax payment cooperation will continue under the Mountie Convention. Gayani Hurulle questions whether companies’ compliance with tax payments will change under the Mountie Convention, an alternative to the current tax system.

Despite these developments, tax officials in India and Nepal have reported a cooperative attitude from companies in paying taxes, adopting a light touch approach to taxation.

It is worth noting that it is not necessary for the Global South to sign up to the OECD agreement now. These countries have the option to wait and observe before deciding to join later.

In conclusion, the issue of taxing large multinational technology companies in the Global South is complex and multifaceted. While countries in the region have taken steps to implement digital taxes and explore various tax options, challenges and uncertainties persist regarding the OECD/G20 multilateral system and the implementation of tax regulations.

Mathew Olusanya Gbonjubola

Nigeria currently does not have a digital services tax in place. Instead, the country relies on a nexus rule, which connects businesses of non-resident persons to Nigeria for tax purposes. This means that if a non-resident business carries out transactions in Nigeria without a physical presence, the income or profits arising from those transactions can still be taxed in Nigeria.

The advancement of technology has made it possible for businesses to operate without a physical presence in Nigeria. Examples of such businesses include online businesses, international consulting firms, and telemedicine services. This technological progress has expanded the scope of taxation for countries like Nigeria, allowing them to tax businesses that exceed a certain threshold of transactions within their jurisdiction.

To ensure compliance with tax regulations, monitoring businesses and their transactions is made possible through financial institutions, as payments need to pass through the banking system. Additionally, companies are also given the option to self-declare their transactions, further enhancing transparency and accountability.

Nigeria’s intention with its tax approach is not to harm businesses but to ensure that taxes are paid where transactions take place. The goal is to create a fair and level playing field where businesses contribute their fair share in the countries they operate in. This approach is similar to that taken by countries like India and Nepal. Nigeria has adopted simplification methods and tax rates that will not significantly affect the profitability of businesses.

Nigeria has actively participated in discussions with the Organisation for Economic Cooperation and Development (OECD) since 2014 regarding tax rules and regulations. However, Nigeria did not sign the OECD treaty in October 2021 due to concerns with several elements of the rules, particularly surrounding issues related to Ammon’s aid. This decision by Nigeria highlights the country’s commitment to carefully evaluate the potential impacts on its economy and ensure that any international tax agreements align with its specific needs and circumstances.

The case of Nigeria not signing the OECD treaty also serves as a cautionary note for developing countries in general. It emphasizes the importance of thoroughly scrutinizing the specific impacts on their revenue before signing any international tax treaties. Matthew Olusanya Gbonjubola shares a similar cautious stance, underlining the need for developing countries to fully understand and consider the implications on their revenue before committing to such agreements.

In conclusion, Nigeria currently relies on a nexus rule rather than a digital services tax to tax non-resident businesses. The advancements in technology have allowed businesses to operate in Nigeria without physical presence, and as a result, Nigeria has implemented measures to tax businesses that exceed a certain transaction threshold. Nigeria’s approach aims to ensure taxes are paid where transactions occur, without significantly impacting business profitability. While Nigeria has actively engaged in discussions with the OECD, the decision to not sign the OECD treaty in 2021 highlights the country’s commitment to carefully evaluate the potential impacts on its economy. This also serves as a reminder for developing countries to carefully consider the implications before signing international tax treaties.

Abdul Muheet Chowdhary

The debate revolves around tax collection and the implementation of digital service taxes. One argument presented is that countries do not necessarily need tax treaties to collect taxes; they can adopt domestic law measures to achieve this. It is highlighted that tax treaties do not grant taxing rights but rather restrict them. Additionally, even without a tax treaty, the residence jurisdiction can still provide unilateral relief. The argument emphasizes that tax is a fundamental aspect of sovereignty.

Another argument put forth is that the United Nations (UN) option of Article 12B provides higher revenue potential for developing countries compared to the solution proposed by the Organisation for Economic Co-operation and Development (OECD). The UN’s Article 12B, particularly with its broad scope, is seen to provide developing countries with almost double or sometimes even triple the revenue compared to the OECD solution.

In terms of digital service taxes, the gross method is described as offering a treaty-based solution to eliminate double taxation. This method, which was developed by the United Nations, involves withholding a portion of each payment made for a digital service as a tax by the government. It is presented as a means to address the issue of double taxation effectively.

Interestingly, despite concerns that the introduction of digital service taxes would lead to companies exiting markets, this has not been observed in practice. Examples, such as Kenya, Uganda, and Tanzania, which have implemented a 5% digital service tax, demonstrate that company investments have not been significantly affected.

Moreover, the claim that companies would pass the cost of digital service taxes onto consumers is largely unsubstantiated. Little empirical evidence supports this notion, suggesting that the common threat of companies transferring costs to consumers is often not followed through.

One noteworthy observation is that multinational companies have attempted to prevent developing countries from implementing their own digital tax measures. This signifies the conflict of interest between multinational companies, which aim to minimize their tax liability, and developing countries seeking to collect taxes from these companies.

Another notable insight is that non-compliance with taxation in the digital economy can potentially be addressed through banks. For instance, Pakistan has implemented a process where banks are responsible for withholding taxes in the digital economy, ensuring greater compliance.

Furthermore, India has introduced an “equalisation levy” strategy, imposing a 6% tax on online advertising targeting companies like Facebook and Google. This strategy restricts payment to tech companies and forces them to file tax returns, enabling India to collect taxes from these firms regardless of their physical presence.

Finally, Abdul Muheet Chowdhary advises waiting for the ratification of the tax measures by the United States and other OECD countries before proceeding with further steps. This suggests the importance of ensuring international cooperation and agreement in tax matters.

In conclusion, the debate surrounding tax collection and digital service taxes is multifaceted. Arguments range from the necessity of tax treaties to domestic law measures, the revenue potential for developing countries through Article 12B, and the effectiveness of the gross method to eliminate double taxation. The lack of observed market exits and limited evidence supporting cost transfers to consumers challenge these concerns. Additionally, the actions of multinational companies, the role of banks in tax compliance, and the implementation of strategies like equalisation levies provide further insight into the complexity of the issue. Ultimately, international cooperation and ratification by key countries are deemed critical to progress in this domain.

Audience

The audience members, including Bagheesha from the Internet Governance Project at Georgia Tech, Kosi from Benin’s Ministry of Economy and Finance, and Kunle, are seeking a clear understanding of how digital tax calculations are performed for companies that operate remotely and do not charge for their services. They believe that it is crucial to establish a clear and detailed process to tax companies like Facebook that do not have a physical presence in certain countries but are extensively used by its people.

Bagheesha, a PhD scholar working with the Internet Governance Project at Georgia Tech, shares their perspective on the matter. Their expertise in the field makes their comment valuable in gaining insights into the complexities of the issue. Kosi, a senior representative from Benin’s Ministry of Economy and Finance, also highlights the need for this information for policy purposes. This indicates that governments and policymakers are grappling with the challenge of effectively taxing digital companies in the absence of a physical presence.

Furthermore, Kunle raises an important question regarding quantifying the amount that digital companies should pay. This aspect adds another layer of complexity to the discussion, as determining the appropriate tax amount for companies operating remotely can be challenging.

The sentiment of the audience is neutral, indicating that they are not taking a strong position on the issue. This is likely because they are seeking clarification and information rather than advocating for a particular stance.

In terms of related topics, the discussion encompasses Digital Tax, Internet Governance, Remote Working, and Social Media. These topics are closely connected as they all contribute to the broader conversation surrounding the digital economy and its impact on taxation.

The discussion also relates to Sustainable Development Goals (SDGs) 9, 10, and 17. SDG 9 seeks to promote industry, innovation, and infrastructure, while SDG 10 focuses on reduced inequality. Moreover, SDG 17 emphasizes the importance of partnerships for achieving sustainable development goals. The linkage to these SDGs underscores the significance of addressing digital tax calculations and ensuring a fair and equitable system.

Overall, the audience seeks clarity on how to calculate digital tax for companies operating remotely. They believe that a detailed process is necessary to tax companies like Facebook, which have a significant user base in certain countries but lack a physical presence. The insights provided by Bagheesha, Kosi, and Kunle, along with the broader topics and SDG connections, highlight the multidimensional nature of this issue and the need for effective policies and partnerships to address it.

Alison Gillwald

The taxation of global digital services has become increasingly complex, with many countries relying on telecommunications operators as their primary tax base. However, a significant issue is that policies surrounding taxation are often developed in isolation, failing to consider the interconnectedness between various sectors such as trade, competition, and digital rights. This siloed approach neglects the potential impact of taxation policies on these sectors and can lead to unintended consequences.

One specific example of these unintended consequences is seen in Uganda, where taxes on social networking and mobile transactions have had negative long-term effects. These taxes have pushed people off networks and reduced the profitability of telecoms operators. This undermines initiatives such as the Digital Uganda program and highlights the need for a more comprehensive and balanced approach to taxation.

Countries are encouraged to consider signing up to the OECD’s BEPS (Base Erosion and Profit Shifting) program. By doing so, they would be able to tax multinational corporations regardless of whether they have a physical presence in the country. This is particularly relevant in the digital age where multinational corporations can generate significant profits without a physical presence. The implementation of a 15% taxation rate through BEPS could provide a significant revenue boost, even for countries with low internet penetration rates.

Outdated tax systems are identified as a key hindrance to potential revenues for states. These systems fail to adapt to the rapidly changing global landscape and often lack the streamlined and integrated approaches necessary for effective taxation. There is a clear need for tax systems to be updated and modernised to ensure governments can capture the appropriate levels of revenue.

Caution is advised when it comes to the potential negative impacts of trade agreements on revenue generation. The African continental free trade area, for example, may reduce intercontinental trade taxes, potentially impacting revenue streams for countries. It is crucial to carefully assess trade agreements and consider the impact they may have on taxation systems.

Alison Gillwald, a prominent advocate for fair taxation, argues for a universal and binding agreement for taxing tech companies. She emphasises the need for a level playing field in which tech companies, especially those without a national presence, are subject to fair and appropriate taxation. Gillwald notes that the current taxation of tech companies is subpar given their super profits and points out that the US is holding out on international taxation agreements. She believes that unless there is universal agreement and binding commitments, the situation will not improve.

Gillwald supports signing up for the OECD’s initiatives but conditions her support on the potential for countries to exert pressure and increase taxation percentages. She suggests that a digital multinational corporation pullout may be necessary from the 15% tax, as it may only apply to giant monopolies rather than multinational corporations as a whole. This highlights the need for careful consideration and negotiation when participating in international tax agreements.

In conclusion, the taxation of global digital services presents complex challenges for governments. It is essential to move away from siloed policies and towards a more integrated and comprehensive approach. This includes considering the interconnectedness of taxation with sectors such as trade, competition, and digital rights. By signing up for initiatives like the OECD’s BEPS program, countries can improve their ability to tax multinational corporations and generate crucial revenue. Updating outdated tax systems and carefully assessing the impact of trade agreements are also crucial steps in ensuring fair and effective taxation. Achieving a universally agreed and binding international taxation system for tech companies is a key goal, with collective action within the OECD having the potential to bring about significant change.

Moderator

The discussion centred around the urgent need for revenue in Southern countries due to the current economic challenges they are facing. Factors such as high inflation, the devaluation of local currencies, and the impact of the COVID-19 pandemic have led to an increased need for revenue generation in these countries.

One of the main concerns raised during the discussion was the unfair distribution of tax revenue from big tech companies. It was noted that the majority of tax revenue goes to a few countries, such as the United States and China, while countries in the global south that generate content and users receive only a small portion of the revenue. This raises important questions about digital justice and the need for a more equitable distribution of tax revenue.

The audience strongly supported the idea of imposing taxes on big tech companies, with 75% in favor of such measures. This indicates a growing consensus that addressing the issue of taxing big tech is crucial for achieving goals related to decent work, economic growth, and reducing inequalities.

Various policy options for collecting tax revenue from big tech were discussed, including direct taxation measures like digital services taxes and indirect taxes like consumption taxes. While there have been global, regional, and national efforts to collect tax revenue from big tech, there is no clear consensus on the most effective approach at this point.

The discussion also highlighted the significant revenue generated by the global south for tech multinational companies. With over 60% of the world’s population online, countries such as India, Indonesia, Brazil, and Nigeria contribute substantially to the revenue of tech companies like Facebook. However, many big tech companies often avoid formal tax nets in the countries where they operate, making it difficult to collect tax revenue.

Countries have multiple policy options for taxing the digital economy, including both direct and indirect measures. This includes introducing domestic law measures and implementing treaty-based taxation systems. However, each option comes with its own challenges, and there is ongoing debate on the most effective approach.

Concerns were raised about the drawbacks of certain approaches, such as the high transaction costs associated with local Digital Services Taxes (DSTs) for companies. Additionally, treaty-based options can reduce the risk of double taxation but come with challenges such as bilateral treaty negotiations and global and market-level revenue thresholds.

Stakeholder engagement and the need for a fair and transparent international formula for taxing the digital economy were emphasized. Global tax rules were seen as a way to provide consistent approaches to allocating profits, simplify compliance, and reduce complexity and uncertainty for multinational companies.

The moderator expressed support for reaching an OECD agreement on digital taxation but acknowledged the challenges and skepticism surrounding the process. The importance of signing up for the OECD agreement was discussed, as it would bring larger countries to the negotiation table and potentially make compliance easier for all countries involved.

The discussion also highlighted the need for clarity and further dialogue about the detailed elements of digital taxes, considering the diverse audience’s varying levels of understanding and expertise.

Overall, the discussion underscored the complex nature of taxing big tech and the digital economy. It highlighted the need for fair and equitable distribution of tax revenue, the challenges in implementing effective tax measures, and the significance of stakeholder engagement and international cooperation in finding viable solutions.

Moderator:
Good afternoon ladies and gentlemen. We will get started. This is the session that we attempt to try and have a discussion around taxation. It’s a very broad topic because the world of taxation is huge. We’re gonna start a little broad and then hopefully narrow down to how we actually deal with the large technology companies. And we’re gonna try very hard to look at this issue of taxation from the point of view of majority world or global south countries. The conversation around taxation is more important than ever now in light of the fiscal squeeze that many are facing in the global south. High inflation, high devaluation of local currencies, COVID have all meant that the need for revenue is very high. There is also a conversation around data and digital justice when a lot of the content is provided and the user base is also from the majority world. Yet very little of the revenue from taxation goes into those countries but are collected by a handful including America and China. This is a timely conversation. There have been many global regional and national level efforts to also try and collect some of this tax revenue. There is no sort of winner at this point. There are various options which we will present and we will talk about. To do this I’m joined by two speakers online and two here with me on the podium. Online we will have Abdul Mohit Chowdhury who is senior program officer at the South Center. The South Center is an intergovernmental organization of developing countries based out of Geneva and they help developing countries to combine their efforts and expertise to promote common interests in the international arena. They conduct extensive work on international tax cooperation through the South Center tax initiative. To my right we have Dr. Alison Gilwald who is the executive director of research ICT Africa which has been a long-standing evidence producer about the state of connectivity, about the state of digitalization and digital rights across Africa and who we work closely with. Next to her we have Ms. Gayane Hurule who is a senior research manager at Learn Asia who is working on some of the tax issues that Learn Asia looks at. Online we also have Matthew Bongibola who is the coordinating director at the Federal Inland Revenue Service of Nigeria and Nigeria is interesting because they have a tax that’s as country-specific tax but Matthew also is co-chair of the UN Tax Committee who also has another proposal on tax so he’s a very interesting sort of he sits on both sides. And finally we are also joined by Victoria Hyde who is the policy and communications manager of the Asia Internet Coalition. Now the AIC is an industry association representing the internet industry across the Asia-Pacific. Their members include Meta, Google and Amazon so certainly all the big platforms and to my left is my colleague Isuru who will help who’s a research manager at Learn Asia and will help with online moderation. So to get us started what we’ve asked is actually for Gayane to set the stage because I think this is a conversation that needs a little bit of data and framing to get into. Oh yes before that we have the pleasure of actually quickly asking this is meant to be a debate because there are actual options humans face I mean in these countries but first we want to do a quick Slido. If you could please go to www.slido.com this is I promise two minutes or less even the online audience and enter 2238752 and fill this poll. And the question is should countries be exploring policy options to impose taxes on big tech. This is not necessarily an obvious answer because many have talked about well let’s not tax because the benefits of digitalization are so high and using the platforms let those actually the economic revenue from that compensate instead of taxes. So what do you think and we want to see if you’ll change your mind at the end of this sort of 90 minute conversation. The code again is 2238752 sorry. Okay so about 70 just under 20% sitting on the fence but a majority 75% saying yes we should be taxing big tech right. Thank you. Let’s move on as I said I’ve asked Gayane to show us sort of a little bit of why this topic is important and maybe present the policy options that are facing developing countries in particular right now.

Gayani Hurulle:
Thank you Helani. If I could just get my slides up wonderful okay. So we’ve very helpfully called this session taxing tech titans. What I’m trying to do here is as Helani said just frame the conversation and give you a sense of what the different policy options are. So what you’ll see is that many of the internet users in the world right now actually live in the global south. So to give you a little bit of context ITU data indicates that over 60% of the world’s population that’s about 4.9 million billion individuals are now online but we’re seeing that a majority of the internet users now reside in the majority world and India, Indonesia, Brazil, Nigeria amongst the countries where most of the internet users in the world live. Now many sorry many apps sorry just give me one second I’m having a little bit of a tech issue. Sorry. All right I think we’re good. Okay yeah. So if we hone in on the case of India for example Learn Asia’s national representative survey that we conducted in 2021 that was in the midst of the COVID-19 crisis found that 47% of the population aged 15 and above were online and given India’s growth trajectory which was very stark this is likely to be greater now but then the question really arises what apps and platforms were they using and we found that the most used apps and platforms when we did our survey was YouTube, Facebook, messaging apps such as WhatsApp and Viber and Instagram. So then the question again is what’s the common thread between these one perhaps is that they are social media type apps but the other is also that they are large that their products of large tech MNCs and despite operating and having users in the global south many of these platforms still largely derive their revenue from the global north. So Meta who we’ve given an example from here derives 70% of their revenue from the US, Canada and Europe in 2022 but while the global south accounted for a smaller percentage of revenue that’s about 30% it’s still sizable and therefore quite lucrative for tech companies. So for example if you look at the graph on the right you’ll see that Meta made 24 billion dollars in revenue from the Asia-Pacific in 2022 and this number doubled over four years so this market is not only sizable and lucrative but also growing. Now despite making sizable revenue from the global south big tech often lies outside the formal tax nets in the countries in which it operates and this has multiple impacts the first of course is a no-brainer it has it impacts government revenue and then if the funds were present it could go into a consolidated fund which then could be used to achieve other developmental targets, education, health care and whatnot. But it can also impact the competitive landscape so we in Sri Lanka for example have seen calls from the local ride-hailing operator to give you context as a local ride-hailing operator pick me and then another an Uber which operates in the same market and we found that the local ride-hailing operator has been calling for the country to introduce digital taxes because they claim that they were paying more taxes than Uber which impacted their cost structures which then in turn created an uneven playing field. So we’ve seen calls from the local tech companies to impose digital taxes to kind of create a level playing field. Now despite the benefits some countries have been quite delayed in implementing digital taxes therefore taxation of the digital sector has been limited to long tax sectors like telecom and IT imports for example and then these issues have been confounded by the lack of agility associated with the legislation of some countries. So for example in many countries the income tax acts deems it necessary for a company to have a physical presence in the country which then allows for companies like Google and Meta and whatnot who don’t have a physical presence in the country to stay outside the tax net. But it’s also worth mentioning that this issue of digital taxation is also sort of there’s an underlying issue around defining and sizing the digital economy and this is a complex one that many countries even countries in the global north have found quite challenging and we’ve found that organizations like the IMF, OECD, UNCTAD, ADB and so on have also been grappling with trying to size this digital economy and figuring out how to define the bounds of it. So in fairness it is a tough exercise possibly one that countries particularly ones in the global south are waiting for some direction on and in the case of digital taxation there have been multilateral processes in place which I’ll get to in in a minute that countries may have been taking a little bit more of a wait and see approach to. However there are several policy options for countries on how they can tax the digital economy. I’ll start with talking about domestic measures and there are a range of options within this. One is using direct taxation measures such as digital services taxes which is where you tax a company based on the revenue that they make from a country. Another is an indirect tax or a consumption tax where which you levy a specific tax based on the point of consumption. You’ll see this in the case of digital service VAT, GSTs and whatnot. But just for the purpose of streamlining our conversation today we’ll focus on the direct taxes and you’ll see that countries in the global south have several countries in the global south have already implemented these direct taxes. We’ve illustrated some cases from South and Southeast Asia so we’ve seen that India, Pakistan, Nepal, Vietnam and Malaysia all have some sort of measure in place but they’re also quite heterogeneous. And even if you hone in further on digital services taxes which is one sub component of the direct taxes you’ll see that they do tend to vary quite a bit. So even in South Asia you’ll see that they call different things, they call equalization, they will see being called the fee for offshore digital services but it really boils down to the same thing where countries tax companies on the percentage of revenue that they derive from the country. And if you look at the three systems in place on screen and sorry this is a little wordy but we wanted to make sure that we just put out all the information here that we can go back to. You’ll see that India, Pakistan, Nepal they’re quite different and this actually does speak to the benefit of one of the benefits of a local DST in that it’s customizable and flexible which is what you don’t really see in some of the other multilateral or treaty based options that we’ll talk about later. But it also speaks of a cost to companies because they have to deal with different tax regimes being in place in different countries and therefore have quite high transaction costs in trying to pay taxes so compliance costs are quite high. So if we just look at the differences in these three country measures you’ll see that they have different tax rates. So India and Nepal for example have a tax rate of 2% while Pakistan has 10%. There are some countries that have taxability thresholds so revenue flows to protect small businesses but it is absent in other countries like Pakistan. Then you’ll remember that I spoke earlier about this issue of archaic income tax acts. Pakistan has amended that act to allow for digital taxation through their existing act but India and Nepal have introduced separate legislation outside the taxes, sorry outside the acts to impose these taxes. So you’ll see again the approach to digital taxation even through these DSTs can be quite heterogeneous. Now while these domestic measures have been put in place and discussed there have also been parallel efforts to explore treaty based options and this is the benefit of having a treaty based option is that it reduces the risk of double taxation and there are two main treaty based options on the table. One put forward by the UN and the other by the OECD and G20 and there are various different sub components within this as well but I’ll focus on the two elements that are seen as alternatives to the digital services taxes that we discussed earlier. That’s article 12B in the UN model tax convention and amount A in the OECD G20 inclusive framework to bidder solution. So there are a couple of differences even within this and again I won’t get into too much detail here. Hopefully we’ll be able to talk about this in more detail in the discussion but it’s worth noting that the UN’s article 12B is to be implemented through a bilateral treaty negotiation. There has been some conversation about a multilateral option but right now what is clear to us and what is available in the public domain is this bilateral mechanism. So for example if a country X is headquartered in the US and a country sorry if a company is headquartered in the US and a company would need to have a country would need to have a treaty with that particular country to tax the company that’s within that sort of locality and this builds on the domestic measures by reducing the risk of double taxation. It can be quite cumbersome and impractical in its current form. Then there is the OECD’s amount A convention which is the most well-known and debated in the public domain. This is the multilateral convention. It defines which companies are eligible not by listing services which is what you’ll see in the case of article 12B and in many of the local digital services taxes that we saw earlier but by providing revenue and profitability thresholds both at a global level and also at a market level and it has a fixed rate across countries which is attractive to platforms but there are also sort of negatives which we’ll get to later. Now while these different options have their relative merits they have the potential to give countries different quantums of revenue which I hope Abdul will have will be able to comment more on. They’ll have different impacts of competition and they’ll have a lot of different costs of implementation be it negotiation costs, compliance costs and so on. I won’t get into a lot of detail here but hopefully we’ll hear about this more from our speakers. So just before I hand the floor back over to Helani, I’d like to highlight that there’s a crucial decision point that countries need to make in the next few months. The OECD and G20 has indicated that they hope to implement their multilateral solution in 2025 and have asked for countries to sign up for the amount A convention by the end of 2023 and this is important for several reasons. This could be the beginning of a multilateral system which is a first best solution but if countries sign up for this program they agree not to impose domestic measures until the end of 2024 and then there’s the actual implementation of the convention is contingent on the US signing this and that’s a lot of power in the hands of a single country. So there’s some apprehension and skepticism on this as well which perhaps we can talk about in more detail. So it’s for this reason that we thought that we’ll center our discussion on whether countries in the global south should sign up for the OECD and G20 multilateral convention by the end of 2023. I’ll stop here and hand the floor back over to Helani, looking forward to hearing more from our speakers.

Moderator:
Thank you. So just to clarify Gaini, December last year I believe was the initial deadline set for the negotiations to happen, the US and countries to agree on the proposed taxation with the OECD. That didn’t happen and now December this year is the new deadline. So the options for countries is if you sign up to the OECD convention you can’t do anything until end of 2025? Until end 2024.

Gayani Hurulle:
So it’s a one-year goal post that keeps getting shifted.

Moderator:
That keeps getting shifted, okay. So you can’t then go ahead and do some local taxation and so on and so forth. However, there are countries that have done low national level taxation policies and said in the policy itself until such time OECD agreement is reached, this shall remain in play, right?

Gayani Hurulle:
Yes, possibly. And there are also other countries who have implemented their own DSTs and then signed up for. And then still signed up for the OECD. Afterwards. Okay. Because what that convention specifies is that you can’t implement a DST after you sign up for it.

Moderator:
So they’ve been quite shaky. So presumably you said India has a national level digital services tax, a DST. If the OECD thing comes into play, they can somehow sunset the national level stuff and go with the OECD. Okay, that’s where we are. Great. Thank you. I’d like to bring in Abdul from the South Center. Abdul, you know, you’ve been really working on this and the South Center has sort of been leading the charge on the UN proposal which is what expects every country. to bilaterally negotiate with other countries in order to be able to tax. So and one of the things actually I asked Gaini to do is to frame your discussion just to put some numbers that you know your reports have calculated. Because for countries one of the big considerations is revenue potential. Where can I get more tax revenue from which option. So keeping that in mind could you talk us through in particular the UN option and why that might be a preferred solution for countries Abdul. And can we unmute?

Abdul Muheet Chowdhary:
Thank you. Yes. Thank you. Good morning. Good afternoon to and good evening to everyone. It’s a pleasure to collaborate with Learn Asia at this event. And my greetings to Mr. Matthew Gupanjubul, the co-chair of the UN Tax Committee. And I’m honored to share the panel with him who in fact has been a champion of the developing countries in taking Article 12B forward. So on in response to your question, Helene, as we can see from the data, Article 12B has two methods, a gross method and the net method. And just to highlight that countries don’t really need either option. They can just introduce domestic law measures and start collecting taxes. You know the this thing of that you need a treaty is really this hullabaloo around a treaty comes more from the developed countries because they want to actually reduce the taxes companies face when they go to when they go to developing countries and derive revenues from them because tax treaties, they don’t grant taxing rights. They restrict taxing rights. I would repeat tax treaties don’t grant taxing rights, they restrict taxing rights. Even without a tax treaty, the residence jurisdiction can always give unilateral relief to its taxpayer. So if Uber works in Sri Lanka and Sri Lanka introduces a digital service tax and there’s no Article 12B amount there, there’s no treaty-based solution. The U.S. can always tell Uber that okay you pay taxes in Sri Lanka so we’ll take that into account when you pay taxes in the U.S. So those unilateral relief options are always there and we’re there actually because even now it’s not like every country in the world has a tax treaty. So just to mention that even without tax treaties countries can collect taxes. Domestic law is the basis for collecting these taxes. Even if they have treaty-based solutions but no domestic law provisions, they cannot collect anything. Tax is a fundamental aspect of sovereignty and this is something countries should keep in mind. Now with that out of the way, if you look at Article 12B, the revenue estimates which we came up with, you have well the comparison should be with amount A, the 20 billion euro threshold and Article 12B with the two options of ADS only and hybrid ADS. Now why is the UN option a better option by and large for developing countries? One is because if we see most developing countries don’t actually have a very big tax treaty network. So it’s not like they have so many treaties to renegotiate. You have a few large countries which have lots of treaties but by and large for most small developing countries, especially the countries in this list, many of them would not have a very extensive treaty network. So it’s not like they would have to negotiate so many treaties and then there’s a revenue potential. We can see that Article 12B with a broad scope, ADS companies and hybrid ADS and ADS is automated digital services like online advertising, income from search engines, income from supply of user data, income from cloud computing and things like that. So that kind of income, if a country goes with Article 12B and has a broad scope, we can see that it gives almost more than twice and in some cases up to three times what the OECD solution gives. So in terms of revenue potential with a broad scope, Article 12B has much better revenue potential if you’re talking about the gross method. But if you look at the narrow scope, if Article 12B has a narrow scope and by narrow scope I mean in Article 12B paragraph 6, you have a list of digital services and if you look at only those digital services and apply the tax only to those specific digital services, then the amount is comparable with amount A which would come from the OECD solution and actually if you look at the net method, that actually gives the least revenue and in fact it gives even less than the OECD solution.

Moderator:
And what’s the difference between the gross method and net method? Abdul, you’re not talking to a bunch of tax people. I think these are very general digital governance audience so

Abdul Muheet Chowdhary:
you do need to explain acronyms. Yes, yes, yes. So the gross method is basically a digital service tax and the net method I’ll get to in a second. So the gross method was brought in to basic, because many countries as Gayani mentioned brought in digital service taxes. So the United Nations developed the gross method to provide a treaty-based solution to eliminate double taxation for digital service taxes. So gross method is the same as the digital service tax. The net method, what the gross method does is that on every payment for a digital service, some portion of that payment is withheld as a tax by the government. So it’s a transaction-based tax. It’s not that at the end of the year the company files the return and pays the tax at one go. It’s on every single payment which is made for a digital service. So for example, if $100 is made for online advertising and you have a 3% rate, then the company which is like Google which is providing the online advertising service would get 100 minus 3, $97 or whatever currency that is. So that’s how the gross method would operate. The net method on the other hand is a tax which is paid at the end of the year. So it’s not a transaction-based tax like the gross method. And the way the net method operates is that it provides a simple formula through which the company can arrive at the net profits. And this is important. It’s called the net method because net refers to net profits. So they give a formula to calculate net profits. And this is important because the big question in the digital economy was how do you calculate profits? Because normally if you look at the brick and mortar economy of a factory in your country, you can audit, you can see how much do you pay on rent, how much do you pay on salaries, and your input costs and whatnot. But in the case of Uber in Sri Lanka, where there is no physical presence, how can you audit? I mean, the company can say anything and there’s no way you can figure out what the costs are. And especially when the whole business model is based on algorithms and intangibles largely. So it becomes very difficult to determine costs. So the Article 12B net method provides a simple formula where you basically see how much local revenue has been made by the company. So in the case of Uber in Sri Lanka, how much revenue did Uber derive from Sri Lanka? And to that, the profitability rate of Uber globally would be applied. So if Uber has a profit margin of, let’s say, 10%, 12%, whatever, that would be applied to Sri Lanka’s local revenues. 30% of that figure would be taken. And to that, the local tax rate of Sri Lanka’s 25%, 30%, whatever rate that is, that would be applied. So that is how the net method operates, broadly speaking. And because of that, because it’s a net basis tax, because it’s not a gross basis tax, obviously the revenue collections are much lower because, by and large, turnover-based taxes or revenue-based taxes tend to have much higher revenue collection. Wonderful. Thank you. So Abdul, you’re basically saying as a matter of national integrity, everyone reserves the right. But in terms of being able to negotiate, what do you think are the transaction costs involved? Unless the UN comes up with a treaty with standardized rates, et cetera, that everyone can sign up to, is it really a matter of Cambodia going and negotiating with China, let’s say, UK, and the US, if those are the three big countries where the platforms come from? Is that what, sort of, is it left up to countries? Yes. So this is the strength of Article 12B, that the decision of which treaty to enter into is left with the country. And now, of course, the question is, can Cambodia really negotiate with China or the UK or the US? And, of course, that’s not easy and that’s very difficult. But it also depends on how Cambodia approaches this. So I’ve just given disclaimer. You know, the tax world is opposite from the trade world in the sense that in the trade world, developing countries are always looking for market access. We want to export to the developed countries. And there, the power is with the developed countries to open the market or not. In the tax world, it’s the opposite. Here, the power of tax is always with the developing countries. We can tax as much as we want, and the developed countries are always trying to reduce the tax which is imposed by the developing countries. So in the case of Cambodia and China or Cambodia and the US, if Cambodia introduces a digital service tax, keeps it out of the income tax law, so the tax treaties cannot apply. If they introduce it into the Finance Act, as Gayani was saying, that India, Nepal, and these countries have introduced a digital service tax outside of the income tax law in the Finance Act, if that is done and the treaties don’t apply, then if China doesn’t enter into a tax treaty, it doesn’t include Article 12B into their tax treaty with Cambodia. It is the Chinese companies and the UK companies and the American companies who will face double taxation. Cambodia will not lose anything. So if Cambodia doesn’t include Article 12B, no problem. It can still collect taxes.

Moderator:
Is market exit by platforms in particularly not-valuable countries, like on a per-user basis or on a gross per-country revenue basis, a risk in this scenario? You know, take a country like Norway or one of our two or something like that, right? If the transaction costs are that high in compliance, would this company stay in? Is market exit the other risk? You said there is no cost. Is that a cost?

Abdul Muheet Chowdhary:
I mean, I didn’t mean to say there’s no cost, of course. I meant to say that if Cambodia says that we want to introduce a tax treaty with the UK and the UK refuses, then if Cambodia introduces a digital service tax, keeps it outside of the income tax law, then they will not lose anything by that. It will be the UK companies who will face double taxation. So I didn’t mean to say there is no cost. Now, on this risk that if Cambodia introduces a digital service tax, will the American companies leave Cambodia? You know, so far we have seen digital service taxes have been introduced by many countries. I mean, three East African countries, for example, Kenya, Uganda, and Tanzania. The heads of the revenue service passed a resolution that we would all introduce digital service taxes with a 5% rate. And I mean, so far, we have not seen this evidence anywhere. You know, we have not seen this evidence anywhere that companies have pulled out in response. The threat that is usually given and usually not followed up on is that they will pass the cost on to the consumers. But as I said, even that, there is very little empirical evidence that this is a standard practice. I mean, it seems to be more of the exception rather than the rule. And also, if you remember, the business models of many of these companies is, I mean, they burn a lot of cash. I mean, they are predatory companies looking to just destroy their rivals. So oftentimes, they are just going with a cash burning approach, you know. So it’s not that profitability is like the foremost consideration on their minds all the time.

Moderator:
Yeah. Yeah. So sort of dynamic effects of driving others out of the market and so on. Okay. Let’s bring in Matthew. Now, you have taken an interesting approach and you have this dual role. Can you tell us about the digital services tax that you did impose and what your approach to the OECD sort of, you know, has been so that the audience understands, faced with the real choice of doing something now or waiting, what your thought process was?

Mathew Olusanya Gbonjubola:
Yeah. Thank you very much, Hilani. And good morning, Abdul and all colleagues on the call. I think we are having a very interesting conversation, which I hope is going to help colleagues all over the world to make a choice. Now, to start with, Nigeria does not have a DSC. We do not have a digital services tax. So I think, so that we are clear, what Nigeria has is a nexus rule that connects businesses of non-resident persons to Nigeria for tax purposes. And that gives the country the opportunity to bring the income or the profits arising from transactions done without physical presence to tax in Nigeria. Now, if we come back to the basic, we should ask ourselves, what is the problem that we’re trying to solve on this issue of non-physical presence of businesses, which we call ITEC and all of that? It all has to do with being able to bring the income in respect of transaction done in a country to tax. Before now, and when I say now, I mean before the advancement of technology, businesses could only be done if the companies or the firms are physically located in the jurisdiction. And so you can see the business, you can see the premises, you can see the officers, the staff, and then you can see the groups or service, and then you can easily bring such to tax. However, with the advancement in technology, it is possible for a surgeon to be in one country and a patient to be in another country, and yet the surgeon will perform or carry out surgery. This was unimaginable 50 years ago. And so the question then is, where does the income arising from such service, where should it arise? Should it be taxed in the place where the surgeon is staying or where the patient is? That had always been the problem. And now the approach of both the UN and the inclusive framework is to bring in some supposition, and which, just like Abdul said, in respect of the UN treaty base, is difficult a little bit for many developing countries to implement, and that is because they don’t have that many treaties. Then secondly, it is doubtful if Nigeria, for example, is negotiating treaty with the United Kingdom or with US or France, that the France or those countries will accept to have Article 12B in their, as an article in the tax treaty. So it’s almost an unsurmountable challenge. But even then, if you succeed in doing that, if you don’t have the domestic legislation, then you still cannot operate that provision. Now, with the inclusive framework option of amount A, we all know the challenges, not just the complexity, but we also saw a lot of elements that we believe are not working in favour of developing countries. And so the option Nigeria has taken is to say, look, what actually is the problem? The problem is I can’t see these people, but I can feel them. I can see the businesses they are doing in my country. And so we therefore used the option of looking at significant economic presence to say, look, if you have enough transactions in my country and we have threshold and has exceeded this threshold, even whether or not I can see you physically, I would deem that you are in my country and the income arising from that transaction will be taxable in my country. And that is what we have done. And this is not limited to digital services. It includes other services, management services, technical services, and all of that. And it is non-discriminatory. So it’s not targeted towards any specific company or country. It is anyone who fits into the definition that we have. So that is the approach Nigeria has taken. And I can say clearly that it has worked for all, worked for Nigeria, and also worked for the businesses, because we also have simplification such that they don’t have to go through very complex process of filing returns and all of that. So I hope my comment is useful. Thank you very much. Yes. Yes. Thank you, Matthew. Just to clarify, what is this test of significant market presence in your case? And how do you actually monitor that, I suppose? Because implementability and monitoring costs are the other side of sort of getting the revenue. Can you give us some thoughts about that? Yes, sure. Certainly, Elani. And thanks. Monitoring and putting values is actually not difficult, because we have the financial intermediations there. If someone sits in one village in Nigeria and is transacting business with a company that is based either in the US or Russia, has to pass through a financial institution. Payment has to pass through a banking system. And so from there, we have a hand, and we can see that. But beyond that, and in fairness, quite a number of the businesses are also people of goodwill, who on their own, with proper engagement, are able to set the clear, to say into your territory, this is how much transactions we have made, and this is how much. So it is both ways. We are able to get data from our financial services, and we also have the businesses who have come to self-declared on the basis of the law that we have enacted in Nigeria.

Moderator:
We had a forum with about over 100 government tax officials, I think, last month. And it was interesting, both India and Nepal had imposed digital services taxes in-country, but both said they’re taking a very light-touch approach because they do really want to sort of encourage compliance but are not really triangulating with all other transactions which they can use across the financial sector, various other ways. Is that Nigeria’s approach as well?

Mathew Olusanya Gbonjubola:
Certainly, the intention of Nigeria is not to strangulate businesses, it is just to ensure that taxes are paid where business transactions are carried out and where income or profit is arising, which is one of the reasons why we had to adopt simplification methods and we also have adopted rates that will not significantly affect the profitability of the businesses done in Nigeria. And so, yes, I would say the intention is not to strangulate business, we do not want to strife for businesses growing up, particularly those in the technology sector, but then everyone still has to pay the fair tax.

Moderator:
Great, thank you, Matthew. I’d like to bring in Victoria from the Asian Internet Coalition. So you, in a way, are sort of an industry body for the big platforms that we are talking about today. Are you of the view that countries should sign up to the OECD Amount A Multilateral Convention? Why? Also, could you talk about the cost of compliance of the various options seen from the big tech platforms?

Victoria Hyde:
Sure, absolutely. Good afternoon, everyone, and thank you for having me here to speak today on this important issue. Yes, as you mentioned, as part of the Asian Internet Coalition, we represent multinational companies that we’re talking about here today in this discussion around taxing these tech titans. And, you know, I just want to kind of give a bit of a brief overview of the digital services tax landscape in Asia. So when we look at this landscape, and indeed globally, it’s clear that there has been, you know, evolving digitalization of goods and services. And we recognize the need for governments to raise revenue, especially in the wake of the COVID-19 pandemic and the fiscal squeeze that Helani mentioned earlier. And in Europe, we’ve seen several countries passing DSTs, and while others in Asia, such as Malaysia, India, Pakistan, as Gayani referred to, have introduced taxes on imported digital services. And I think, you know, as was alluded to again in the introduction, these DSTs vary in their scope and their application. And while some countries tax only specific digital activities, others encompass a range of digital services, but these DSTs can, as you just mentioned, have some potentially harmful consequences. You know, they may distort market behavior, they could potentially pass on cost to the consumers and cause double taxation. So countries have kind of experimented with these taxes in the absence of a global solution, as the second best approach. And one of the things that we tend to do as part of the Asia Internet Coalition is go to governments with by presenting industry best practices. And one of the ones we use is often the G20 and OECD inclusive framework. So in the context of this discussion, you know, around pillar one, just to be clear, you know, it aims to ensure that profits are taxed in jurisdictions where consumers or users are located. So referring to this surgeon patient analogy that Matthew just just mentioned, and also as Abdul mentioned, you know, the Global South is put in quite a favorable position. It holds a lot of power as there is a huge proportion of the consumer basis of these M&Es in the Global South. So if I think about, you know, whether the question that you just asked me around where the big tech companies are of the view that countries should sign on to the convention, I think that the framework offers a comprehensive and inclusive approach to international taxation that holds substantial benefits for various stakeholders, not only multinational companies, but also, you know, some for the Global South and the digital economy more generally. But I think we also recognize the need to tailor tax policies to the unique economic, political and administrative landscapes that we’re talking about here. So for the Global South, I think a couple of the positives that we want to call out, you know, the redistribution of taxing rights, promoting revenue generation in developing countries and addressing the problems of profit shifting and tax havens and harmful tax practices which have historically disproportionately affected the Global South. I think for multinational companies, which is obviously, you know, the industry that we represent, the framework offers clarity and consistency and also transparency in international tax rules. It minimizes tax arbitrage opportunities and it also reduces this risk of double taxation, which I just touched on briefly. It also promotes responsible tax practices from the multinational corporations as well. And I think this is something that countries and consumers are starting to expect of companies as well. And lastly, just for the digital economy more generally, the framework addresses some of the unique challenges posed by the digital age. You know, we’re seeing huge developments in, you know, with relation to artificial intelligence, which I’m sure has been a topic of conversation throughout this forum. And, yeah, we’re seeing that this framework can provide a bit more of a predictable and efficient global tax system for the digital economy and its technology companies.

Moderator:
Thank you, Victoria. Now, if I were a sceptic, and I’m not saying I am, this could be viewed as a way for the big platforms to just overall pay less taxes because the numbers being talked about are quite low as a global taxation rate. And if I were a real sort of negative thinker, again, I may not be, I would think there’s no incentive for the US to actually let the OECD agreement reach anything. That’s what we saw last year. How would you respond to these two statements?

Victoria Hyde:
Yeah, I think that’s a valid point. And I think around what Gayane also mentioned around sort of these implementation delays and sort of the moving goalpost, which we’re seeing with this inclusive framework, it’s completely valid for countries to sort of call into question whether this will actually be implemented. But I also think that it’s important to recognize that this is an incredibly complex framework that’s being put together and one that is trying to achieve global consensus. And is a major step forward in international tax rules. And a lot of the work that they’ve been doing is around gaining stakeholder input, not only from the countries that are represented by, you know, in the inclusive framework, but also from the industry, from trade associations like ourselves, from NGOs. And this is a really lengthy process, but it’s ultimately crafted with the view to create long-lasting rules and avoid unintended consequences as well of these rules. So, yeah.

Moderator:
Abdul, you’re on the other side of this debate. How do you react to what Victoria is saying? Yeah, thank you.

Abdul Muheet Chowdhary:
Thank you, Gayane. You know, I’ll give the background of sort of the context we find ourselves today. This negotiation on the digital economy has been going on since 2013. So it’s been going on for more than 10 years. And actually, the digital economy is part of section one out of 15 actions under the base erosion and profit shifting project. And, you know, the negotiation would have gone on till the end of time because that’s what the Americans, especially because most of these companies are American companies, that’s what they wanted, that you keep talking, keep negotiating till the end of time. And beyond. So the only reason why things have come this far is because countries began initiating national measures or as they are called unilateral measures, but all tax measures are basically national measures. It’s only when countries began introducing digital service taxes, including, I repeat, many OECD countries, UK, Italy, Spain, France and Austria and whatnot, they all started introducing digital service taxes. Then finally, the Americans came to the negotiating table and said, OK, OK. And grudgingly, they agreed to redistribute 25 percent of residual profits, which are defined as profits above 10 percent of revenue. So that’s a very high threshold in practical terms. So only national measures by countries brought them to the table and only continued national and unilateral measures will actually make this thing see the light of day. The Americans have not even agreed to share tax information. I repeat, the Americans have refused to share tax information on a multilateral basis. They have not signed up to these exchange of information agreements, the MCMAA and whatnot. They have a history of wasting people’s time negotiating these multilateral treaties and then not signing them. So even the BEPS multilateral instrument, which would update tax treaties to implement some of the minimum standards, they have not signed. So when they have not agreed to share tax information, can you expect them to agree to share the tax base? And it is extremely unlikely. And I would say Victoria is talking about predictability and certainty. If there is one thing which is predictable and certain, it’s that the U.S. will not sign this agreement. And based on the current agreement in the July outcome statement, if the U.S. doesn’t sign this MLC by the end of the year, then countries can and should actually go ahead with national measures. And in terms of the revenue potential and, you know, I’d just like to add another point on that. The companies, they tried very hard to stop developing countries from initiating digital measures. Then they found out that countries are going to go ahead and there was nothing they could do to stop them. So then the next best thing was to come up with this so-called multilateral approach, which would basically force everybody to bring in a tax which would tax them as little as possible. So that is the key motivation behind this narrative, which we’re seeing.

Moderator:
Matthew, you’ve done a sort of a national level taxation regime. If and when the OECD optimistically treaty is signed, whenever, are you broadly aligned with that? You have elements of that, right? I mean, significant market presence, for example, is a feature of the OECD. They’re not taxing everybody, the large companies. Because you have now sort of committed to the OECD protocol, basically, yes?

Mathew Olusanya Gbonjubola:
Again, for clarity purposes, Nigeria has been part of the discussions since 2014, from the time of PEPS 2015 action points. And Nigeria is in alignment with quite a lot of the outcome that is out there. Now, as regards to the current two-pillar solution, Nigeria has also been part of the discussions from the beginning and we are still part of it. But you may remember that in the October 2021 statement, Nigeria did not sign on to that political statement. And that was because we had serious concerns with quite a number of the elements in the rules, particularly as regards to Ammon’s aid. And my government has not changed that position even now. Of course, we continue to engage and be part of the discussions and the negotiations. But the decision taken by my government in 2021 had not changed.

Moderator:
Thank you. Alison, you’ve been sitting and listening to this, people who work in tax and the people who are going to have to pay tax talking about it. You work in majority world countries, mostly many poor countries, many emerging economies. From a social inclusion equity perspective, what are your thoughts? From a capacity to get this done, what are your thoughts? And really, if we are ever lucky enough in our countries to get some revenue, what on Earth is going to happen to that money in the kind of regimes that we live in?

Alison Gillwald:
It’s a good three hour discussion, I think, but thank you, Helani. I will come to those bigger questions. I just wanted to say how important it is to be having these discussions and that we’ve been doing this research over a period of time because the complexity of particularly with these intensifying global digital digitalized services and things have made the tax issues far more complex. And a lot of the arguments that were made around maintaining or reducing or just controlling local taxation on, for example, telecommunication operators so that they could roll out those networks and reinvest in those networks and compel them to reinvest in those networks or the failures of secondary taxation through universal service objectives because, in fact, those weren’t being rolled out. And the arguments that kind of let these services drive themselves more affordably and get that take up and then you’d be able to tax the corporates and people who are all going online and doing that sort of thing. So those arguments were made from a very pragmatic point of view, acknowledging in our networks all in Africa the incredible constraints there are in revenue generation on the continent. Many of these countries, the mobile operators were primarily the tax base for the country with a tax base of one or two percent of the population. So those arguments are very different from the arguments that we were having even 10 years ago, maybe eight years ago, around the end user taxes that were coming with social networking that was these over the OTT services that were coming on top of the telecom operators. And there was, of course, a lot of argument around revenue share with those operators themselves and issues of local competition and all of those things, which I think are completely pertinent to this discussion. I think what’s really important about these discussions is that they’re not just taxation discussions, that we’re actually understanding the implications of taxation on trade, trade changes that are happening, on competition issues that are arising, because at the moment that policy is being done in a very siloed way that goes to the issues of national sovereignty, but actually the various imperatives, development and economic imperatives, the FISCUS is looking very strictly at maximizing revenue, the digital department or comms or whatever it is, is very much looking at digital universal service and those kinds of things that would actually drive economic growth, but they’re often not talking to each other. Trade is going off into a completely separate thing, possibly with some kind of alignment on tax, but not much else. But then we had the social networking taxes, and these were enormously regressive taxations on end users, introduced in some of the poorest countries in the world primarily, with actually very counterproductive effects. So if you look at Uganda, for example, they were introduced at a time to get, you know, a sovereign debt repayment that was needed to the poorest of the poor, you know, who were on these social networks, were actually pushed off the networks with these 1% taxes on each transaction, on mobile transactions and those kinds of things. Not only did it actually undermine their digital Uganda program, universal service program, but actually it also made the telecoms operators less profitable. There was enormous loss of revenues from them, from corporate tax. So the long-term effect has been quite negative. And then it’s overlaid with a political agenda. So the actual Gazette, the regulation that refers to this, says it’s also trying to stop social gossiping, online gossiping and that sort of thing. And around a time of, you know, political dissent. So, I mean, you’re getting a whole lot of really irrational reasons for taxation. So that has been, we’ve made a very strong argument to get, you’re not taxing end users of these digital services, you’re not taxing the titans, you’re not taxing the people who should be paying for these services. And so often now the discussions around whether countries should be signing up to the BEPS and at least getting 15% of those big tech companies amongst multinational corporations, that, you know, we have not been able to tax because of the lack of presence in country to use this mechanism to at least get that 15%, which would be very significant in many countries, even with the low internet penetration rates and those kinds of things, and ideally releasing these end users from those kinds of taxes. And yet some of the people who, you know, as I said, because this is complex and there’s not an understanding that the social networking taxes in these countries at the moment, mainly in East Africa, but very attractive to other parts of the continent, are actually end user taxes. There’s now often been a kind of knee jerk reaction to taxing digital companies under the BEPS regime, the base erosion and profit shifting regime of OECD’s proposed regime, is, you know, we mustn’t tax them either because it’s going to affect, you know, Facebook’s going to move out of, you know, Africa or whatever it is. And I think, you know, we really need some complexity because I think we’re all advocating for the same thing, but we need to understand those linkages, you know, and how this whole ecosystem works. And as I said, not only within the digital sector, but affecting these other sectors. And so this work was really done in the context of trying to understand trade and taxation issues in Africa and several interviews done with many, many countries, including Nigeria, and working, well, not working closely, but, you know, following the work of the African Tax Administrators Forum, who obviously represent the interests of many tax administrators across the country and therefore had to represent the position on unilateral taxation. I mean, a country like South Africa, for example, you know, corporate taxation is a minimum of 35 percent, many of these other companies looking at higher taxation rates. So an offer of 15 percent is, you know, just doesn’t look like very much at all. And it has an effective tax, you know, collection regime, et cetera. So it is, I think it’s very different for different countries. As I said, I think it’s really important that one understands the different dynamics in the context. So in the African context, besides the issues of sovereignty, is that I think as Abdul was pointing out, many of these treaties are limiting and binding. They’re not seen as opportunities to actually be accessing that extra 15% or something. So this paper that we interviewed a lot of people and there was a lot of feeling that people, the fiscals would never give up the little hold that they had on something in order that they would get something bigger or get something later on. And certainly didn’t want to be tied into these moratoriums, which we’re seeing anyway, from the trade agreements that are impacting on revenue generation. So I just wanted to say that was a kind of work that’s been done a lot of in Africa, but we’ve also done very important work, I think, with Learn Asia and with IEP, across the issues that I think we really need to understand where taxation fits in. Really looking at the interplay between digitization, increased visibility to the state, state formation, revenue generation, taxation, redistribution, because I mean, we need those taxes to do the redistributive work that we’re wanting to do post-COVID, well, during COVID and of course post-COVID around economic reconstruction. And that paper is actually out being launched today. So please do watch our Twitter feeds for that. Because I think the visibility that’s coming through digital transactions has implications that can be used positively, both for people who currently might not be paying legitimate taxes to be more visible to the state, but also for informal sector who have often not been able to be the beneficiaries of redistributive programs because they’re not visible, now being increasingly visible through tax, and obviously don’t qualify for taxation so they’d be visible from a tax point of view, but they wouldn’t qualify unless they don’t, unless they do qualify for taxation, but then be visible in the social protection role. So that’s, I think, an important side from the ongoing post-colonial struggles around state formation in many of our countries and the need to have the revenues to build those institutional capacities and some of these really big development challenges that we face on the continent. But I think, as I said, I think specifically in terms of the taxation issues and the trade issues that are going on now, I think, well, the whole BIPS process was actually an acknowledgement of how outdated these tax systems are. But it’s important to notice that the foregone potential revenues for states, particularly in the context of the pandemic, as I mentioned, and economic reconstruction, but it’s compelled us to look at updating the tax system of engaging in these various processes and better representing our interests, which I think we’ve not been effective as regions, as the global South, and doing this kind of research to inform a more integrated position for countries and regions to take is very important. For Africa, I think the situation is even more precarious, as I said, very fragile or non-existent tax systems in place anyway, largely dependent on aid and with all the associated issues that that raises for political economies. But then we’ve also got these big continental and international trade issues, where we are seeing enormous amounts of foregone tax in agreement. So the African continental free trade area, which has come into force, although it’s not operational in many ways, but there is expected to be a significant drop in conventional physical trade. Although I should say that there’s a sad amount of intercontinental trade anyways, a lot of our trade is actually outside, but that will have significant effects, especially for those countries who are not highly digitized, not leading these digital services, spreading out throughout Africa. And as these trade barriers begin to ease across the region and e-commerce is taking off and the digital services protocol is just being negotiated right now for the African continental free trade area, we’re going to see those kinds of impacts of a digital single market on traditional trade taxes that have been there. And so this really makes this assessment of aligning, positioning our local tax regimes on the continent, some kind of harmonization we will have to have in terms of the continental free trade area and the digital services underpinnings of it with the international tax regime, because these are essentially digital global, digital public goods that we very often talking about, data flows and these kinds of things. And I think historically we’ve looked at global governance from a kind of harms and protection point of view. We’ve looked at from a kind of trade and digital services and e-commerce point of view, but the taxation component of this, the actual generation of revenue for countries in order to service their needs. And I think historically we used to be, don’t put a secondary tax on telecom operators unless it goes back to the digital industry because otherwise we never see it. But digitization is now so cross-cutting that it’s absolutely appropriate that if.

Abdul Muheet Chowdhary:
Used to digital service tax, which applied to both residents and non-residents, but then later on they restricted it to non-residents. So it’s only the foreigners who now have to pay the tax. So that option is always there with countries. Second point is that on extraction, in the digital economy, you can really see extraction in a raw form because the classic argument that if you have taxes, then investment will go away, kind of breaks down when we look at the digital economy, because these are not coming with money to set up a factory and hire local people and create jobs. These are by definition companies. I mean, as in the case of Uber with Sri Lanka, they have literally no physical presence over there. The only jobs which are being created, so to speak, are the Uber drivers who could get those jobs even from Pick Me and other local companies. And in the case of online advertising companies like Google and Facebook, then you can really question, what is the actual investment coming into the local economy? So this argument that raise taxes, investment goes away, should be seen very differently when it comes to the digital economy. And we can really see, as I mentioned, extraction in quite a raw form. The third point which the Kenyan gentleman had spoken about was non-compliance. One option which is there for countries is what Pakistan has done, which is where they have told the banks that you collect the taxes of withholding and give it to us. So in the case of Kenya, for example, the company has to on its own come and pay the tax. And of course, if they don’t, then there are compliance issues, but there’s always a Pakistan approach where the banks withhold it. So the company basically gets the balance, yeah.

Moderator:
Victoria, anything to add?

Victoria Hyde:
Yeah, I think if I can jump in here, I also want to reiterate the point that Matthew made around the importance of stakeholder engagement. I think it’s hugely important so that both the government and multinational companies can set expectations. But you said that companies came to you with some concerns around the complexities of the arrangement that you have in Kenya. And I think this is where global tax rules can come in to reduce the complexity and uncertainty faced by M&Es due to sort of varying tax regulations and to sort of facilitate more transparent and predictable tax governance for them, as well as simplifying compliance by providing more standardized and consistent approaches to allocating profits. And this is where M&Es can more easily determine their tax obligations and ensure compliance across multiple jurisdictions.

Moderator:
Alison, Ghani?

Gayani Hurulle:
Yeah. I can just respond on a softer approach on the second part of the question on what if the companies don’t want to pay taxes. And I just want to reflect on a conversation that we had with the Nepali and Indian authorities when we had our forum a couple of weeks ago. And what those tax officials said is that so far they’ve had the companies actually playing ball and paying taxes, though they’ve taken a relatively light touch approach like Hilani mentioned earlier. So it’s, so far they’ve had little issues, but the light touch approach was key. But the question really is, is this dynamic going to change if and when the Mountie Convention comes into place? Because then there’s an alternative. So these are also questions that we’ll have to keep asking in whether the sort of answers that we’re giving today also continue to be sort of static and stagnant or whether those also will change over time.

Alison Gillwald:
So I think that was just one of the points I wanted to make because I think one of the issues you are speaking about and I think one of the issues that have come up here are really the issues around being able to tax the big tech companies in our context that don’t have presence within country. And you’re saying, oh, well, they’re playing ball as they should. If you’re looking at the kind of super profits that these companies are making, the kind of gratitude that’s actually contributing to these taxes just seems to be, it’s really not addressing these kind of bigger problems. I mean, I think, yes, we must take and risk it, it must be fair, it must be transparent. But in fact, although the kind of agreed international formula on this would make things clearer, it’s not worked in the favor of some of those countries. So we really need to, and we’ve got the US holding out on things. So unless everybody kind of comes to the table and we agree on it and it’s binding on everybody, it’s never going to get the kind of traction that we’re looking for.

Moderator:
Thank you. We’ve got an in-person question. You have a question as well. We’ll take two questions very quickly with very short answers.

Audience:
Okay, hi. So excellent panel and excellent discussion. I’m learning quite a lot of things here. I’m Bagheesha, I’m a PhD scholar and I work with Internet Governance Project at Georgia Tech. Now, what I’m going to ask might be a little bit more fundamental because I’m still learning about digital taxes. So please bear with me. I am struggling to understand how the calculations of profits are done or how the calculation of tax itself is done in sense that I think Abdul mentioned initially about revenue from profits for services. It’s easy when you have to calculate it for Netflix or something because you’re paying for those services. But how is it done for a service such as a social media website where we’re not directly paying for anything, right? And I think you also mentioned about how this trickles down to something that a user ends up paying for a Netflix or another digital subscription services. So just more fundamentally on how does one conceptually think about this and yeah, that’s about it. Thank you. I’m Kosi. I’m a senior from Benin. I’m from Ministry of Economy and Finance. It’s not very clear for me now. Facebook is not physical in Benin, for example. But many people using Facebook service, how can we test Facebook? Please make me information detail by detail, step by step because my minister are waiting for that. Thank you. There’s also a question online. My name is Kunle. My question is for digital companies. How do you quantify how much they are to pay based on the fact that most of them are operating remotely? You’re getting at this. So, I mean, this has to do a lot with what are the costs Facebook? What is the cost and revenue of Facebook in a country like yours? Advertising revenue and subscriptions like SMEs pay, you know, to have a certain type of page. We might buy advertising space to announce that, I don’t know, we’re running a conference. Hotels might buy advertising space. What are their costs?

Moderator:
Our marketing, maybe some allocation of the policy staff, the marketing staff, which might be per country or shared across countries. I mean, those are the types of costs and revenues that these companies have. Even if they don’t have a presence. If they have a presence, then of course, there’s sort of, you know, infrastructure that they run and so on, yeah? So I’ll take a very quick set of responses, like really under one minute from the panelists, but I am going to put you in touch with Abdul so you can have a longer conversation because I think that is important. Part of what we’re really trying to do with the panel, this is one of the first panels at IGF and I’ve been coming since 2006. That’s really trying to get at some of the detailed elements of this. So we need to have a much longer conversation. So we will put you in touch. Reactions from panelists, please. Thank you. Thank you.

Abdul Muheet Chowdhary:
Thank you, Helani. I’ll just respond to the gentleman from Benin. I would say, sir, please look at the equalization levy of India, where they basically started out with a 6% tax on online advertising, which was targeted at Facebook and Google and these kinds of companies whose main revenue stream is from advertising. Broadly speaking, tell your bank that if somebody in Benin is paying Google for online advertising, then introduce a rate of 4% or 5% or whatever and tell that bank to withhold that percentage of the withholding and keep it as a withholding tax. Whether Facebook or Google are there or not in Benin, that doesn’t matter. The money will be restricted from them when they receive the payment and they will be forced to come and file the tax return. And if they don’t, well, that’s their loss.

Moderator:
So before the money goes out of the country, the financial institutions are legally obliged to have a withholding tax and then remit it back to the tax authorities, what Abdul is saying. Anyone else wants to respond? Or we can go to our last sort of rapid fire. We’ve had very sort of, you know, interesting there’s some convergence, right? Abdul is basically saying national levels taxation is important because that is what actually brought the US and other people to the table. And we need to do this. It is also a matter of national integrity. There seem to be outs if somehow we have a longer term, you know, multi sort of country treaty option. Matthew is broadly, I think, along those lines. He’s gone for approach that somehow sort of, I think the devil is in the details, which, you know, we really do see. He sort of had a threshold. So the smaller guys are not really impacted by this, but still has a mechanism to get revenue. Victoria is saying, I think that this is sort of the OECD option is really a viable one. Compliance becomes easier. And related to that, Alison is actually saying that, you know, countries stand to gain something because it’s sort of like you can free ride along with this if this treaty happens, right? So it’s a really interesting negotiation position of what the long term game is and what might be the short term approach that countries use. So we don’t have conclusions. I want you to say in, you know, sort of a 10 word tweet, Abdul, Matthew, Victoria, Alison, what countries should do, and then we’re gonna run a poll asking you in the audience, what countries should do. So let’s get the slider up, but let’s start with Matthew. Very quickly, what should be the approach of developing countries given these options? Should they sign up for the OECD treaty and wait?

Mathew Olusanya Gbonjubola:
I would say that developing countries should look very clearly, read between the lines, if they intend to sign, and to be sure of the specific impacts on their revenue.

Moderator:
Okay, so you’re saying, I don’t know, but look at it closely. Abdul.

Abdul Muheet Chowdhary:
Wait for the U.S. and other OECD countries to ratify amount day before thinking of how to proceed.

Moderator:
Okay, so don’t commit until U.S. and other countries ratify. Victoria.

Victoria Hyde:
I think that without a global consensus based solution, the risk of further uncoordinated unilateral measures and retaliatory trade sanctions is a real concern.

Moderator:
So you’re saying, yes, please sign up for the OECD. Alison.

Alison Gillwald:
Yes, I’m also saying sign up for the OECD, but very conditionally. I think that if enough countries sign up and there’s enough pressure put, there’s a kind of block that can actually force these percentages higher so that they begin to align with what corporate taxation would be in their countries. And maybe that requires a digital multinational corporation pullout of the 15%, because obviously that’s not applicable to multinational corporations just on these big giant monopolies.

Moderator:
So conditionally, yes. Gayani.

Gayani Hurulle:
No, by the end of 2023. So very much like what Abdul is saying, because only- Don’t sign up to the OECD for now. Only 30 countries and with 60% of the market share need to sign up. Global South doesn’t fall into that basket. So it’s not necessary. They can wait and see and sign up later.

Moderator:
So we can free ride essentially and wait for that. Okay, excellent. What does the audience think? The Slido is gone. Could we please go to… You have to connect it. Okay, slido.com. And the number for the poll is 2823924. Should countries sign up for the OECD amounted multilateral convention by the end of 2023? Half of the audience says no. Interesting. So close to a split opinion, I think, given the small sample size. 42% saying yes. And just under 10%. Oh, okay. More moving towards no. This is a live situation, but still around 8%, I don’t know. Okay, so I think it’s quite close, which it’s a good thing. We need to keep engaged on this. Thank you, guys. Thank you for staying. We’re just on time. Thank you for the questions and the audience and the really good panel engagement on this. We’ll hope to see you next year with a much more sophisticated understanding of what we should do. Thank you. »Applause.