Trade and tax: Adapting to digitalisation

Author
Marilia Maciel

[Read more session reports from WTO Public Forum 2019]

Mr Soumaya Keynes (Trade and US Economics Editor, The Economist) explained that the underlying narrative of the debate on taxation usually revolves around multinational corporations that do not pay their taxes. Recently, some countries have acted unilaterally to resolve this issue, but the session focused on multilateral discussions taking place, for example, within the OECD and the G20. The session aimed to provide an overview of multilateral discussions, which can be approached by tackling  two questions: 1) How do we tax businesses that operate remotely, without a physical presence within a country? 2) How do we ensure that  multinational corporations pay a minimum level of tax globally?

Mr Eric Robert (Tax Policy Advisor, Centre of Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD)) explained that governments have two primary  concerns: tax avoidance issues and the adequacy of the current tax system for the digital economy. The former concern aims to close gaps that allow multinational corporations to avoid paying taxes. The OECD delivered a package on tax avoidance in 2015, which is now in its implementation phase. The second issue is related to assessing whether the fundamental features of the present tax system are still appropriate in a context of digitisation and globalisation.

Mr Dmitri Jegorov (Deputy Secretary-General for Tax and Customs Policy, Ministry of Finance, Government of Estonia) recalled that in 2017 Estonia held the UN presidency and proposed a  discussion regarding  taxation in the digital economy. The goal was to raise awareness of the issue among member states of the EU. According to Jegorov, trade has evolved, the economy has changed, and rules regarding taxation have not been updated. For example, the fact that digital businesses do not have significant physical assets and do not need to be physically present in a certain location makes application of taxation laws difficult. Companies may be present anywhere in the world, but have a presence for tax purposes in only few jurisdictions. This disrupts fair competition. To correct this situation, Estonia advanced the idea of a virtual permanent establishment: if a company is present in a particular jurisdiction (even if digitally) it should be subject to the same tax norms that apply to other companies in that jurisdiction.

Ms Irma Johanna Mosquera Valderrama (Associate Professor of Tax Law, Leiden University) summarised the essential concerns of developing countries in regard to taxation: a) improving fairness, not only in the relationship with multinational corporations, but also among countries; b) the need to attract investments; c) the facilitation of trade and the removal of barriers to cross-border trade. Multilateral discussions, such as those taking place in the OECD need to include non-OECD countries. Moreover, the technical capacity of developing countries to tax highly digitalised businesses needs to be strengthened.

Mr Nicholas Bramble (Trade Policy Counsel, Google) argued that corporate income tax is an important way in which companies may contribute to the communities in the countries where they operate. Google pays 80% of taxes to the US, but this is a state of affairs reflecting long standing tax rules. Companies of other nationalities will also pay most of their taxes in their home country. Google recognises that the current tax regime needs to evolve to reflect changes brought by digitisation; for example, more taxes should be paid where products and services are consumed. Google supports the OECD discussions to modernise taxation. At the same time, Bramble stated that OECD primarily discusses income taxes and ignores other taxes, such as VAT and sales tax. According to him, the digital sector cannot be restricted. Every other sector of the economy is becoming digital (e.g. healthcare, agriculture), so the lines between the digital sector and other sectors are blurred.

Mr Eric Robert (Tax Policy Advisor, Centre of Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD)) affirmed that tax discussions at the OECD are at a critical juncture: the G20 asked for progress on base erosion and profit shifting (BEPS) discussions by 2020. A work programme was adopted in May 2019, but competing proposals on the first pillar of discussions, which relates to the allocation of taxing rights, have delayed progress. Intending to move the debate forward, the OECD secretariat released a proposal to bridge the gap between different approaches. If consensus is reached, it could become a truly global solution to taxation issues. If not, a proliferation of unilateral measures on taxation could fuel trade wars.

Jegorov explained that the unified approach proposed by the OECD secretariat deals with residual profits that could be re-allocated to other jurisdictions. He suggested that the proposal could have gone much further by greater alignment with the reality of the digital economy, but it is nonetheless a positive starting point.

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