How Politics Is Hurting the Digital Tax Debate (Corrected)

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By Ben Stupples

Financial advisers often warn clients against seeking tax-driven investments with the following mantra: “Don’t let the tax tail wag the investment dog.”

Today, the logic of this phrase may equally apply to policy efforts on the taxation of internet-based companies that focus on how their users create untaxed commercial value.

Tax professionals have recently suggested that U.S.-focused political tensions are strongly swaying this issue, hurting work on wider tax matters arising from these companies.

They think, in other words, that politics is “wagging” the digital tax debate.

“With digital, politics is way out ahead of the issue,” and “it’s not helping the current environment,” Richard Collier, associate fellow at the University of Oxford’s Saïd Business School, said July 2 at the institution’s 2018 summer tax conference. “It obscures what we’re dealing with here.”

Nancy Manzano, director in the chief tax office of Vertex Inc., a tax software company headquartered in King of Prussia, Pa., strikes a similar tone.

The work “appears to some folks to target U.S. multinationals,” she told Bloomberg Tax. “That realization fuels the politicized nature of the debate, and then takes the discussion away from one that focuses purely on policy and how we fix the issues,” she said.

Remote Presence

Assessing where to tax digital companies, due to their lack of physical presence, has created problems for governments and led to growing calls to reform the taxation of the likes of Facebook Inc. and Alphabet Inc’s Google.

While the OECD is seeking a worldwide consensus on these reforms for 2020, the European Commission proposed in March a 3 percent tax in the meantime on digital companies’ revenue streams, similar to India’s equilization levy.

The move from the EU’s executive arm came amid President Donald Trump adopting an increasingly antagonistic stance toward the 28-member trading bloc, culminating in him calling it a “ foe” last month.

Unveiling its digital services tax (DST) plan, forecast to raise as much as 5 billion euros ($5.8 billion) a year for member states, the European Commission stressed its proposal doesn’t target U.S. businesses.

Media giant Bertelsmann SE’s CEO Thomas Rabe inadvertently backed this claim in a July 2 editorial for German newspaper FAZ, describing the commission’s plan as “problematic” for businesses like his, as it would lead to double taxation.

However, Bloomberg News reported April 28 that EU members including the U.K.—an original DST advocate—had cooled support for the proposal, partly due to fears around Trump’s trade-war rhetoric.

“There seems to be a world of saber-rattling at the moment,” Edward Troup, the U.K. tax authority’s former executive chair, said July 9 at a London tax conference. Essentially, a revenue tax on digital companies is “an interesting gamesmanship question as to how you deal with the President of the United States,” he added.

Trade Deal

At the end of July, the transatlantic saber-rattling between the U.S. and the EU fell silent after they struck a swift trade deal in Washington D.C. Most importantly, the pact marked an end to Trump’s threats of extra U.S. tariffs on European imports.

By doing so, the deal also marked a reduction in the tension surrounding the European Commission’s DST plan, which is still far from the unanimous support it needs from EU member nations to become law.

But even with the cease-fire between the U.S. and the EU, discussions on the taxation of the digital economy remain highly politicized —and Silicon Valley’s fightback, with Google speaking out last month, is only just starting. EDiMA, a Brussels-based trade group for U.S. tech businesses, didn’t respond to a request for comment.

The view that efforts on the taxation of the digital economy are targeting U.S. companies is “a risk that countries need to deal with and manage,” Tim Power, deputy director of the U.K. Treasury’s corporate tax team, said at the University of Oxford conference. “Do I think the EU proposals and actions taken by other countries are perceived as being targeted at U.S. multinationals? Yes, definitely,” he added.

U.S. Reforms

Alongside warnings from individual companies, U.S. Treasury Secretary Steven Mnuchin has stressed his strong opposition to any attempt to target internet-based companies, labeling them some of the country’s top economic contributors.

Yet amid the U.S.’s external warnings, it may have developed internally a solution to the taxation of the digital economy.

In the U.S.'s 2017 tax act, the country included a minimum levy on domestic companies’ offshore income that effectively reduces the incentive for the businesses to hold lucrative intellectual property overseas. As the global intangible low-taxed income makes U.S. businesses pay more tax overall, the measure has put scrutiny on efforts—considering the general perception that they target American companies—around the taxation of internet-based businesses.

The GILTI “gets raised” by OECD countries in discussions on this issue, said John Peterson, head of the organization’s aggressive tax planning unit, at the University of Oxford conference. Due to it, countries like Ireland have questioned the need for more levies on internet-based businesses, he told Bloomberg Tax.

But Ireland, the location of Facebook’s global headquarters, is still cautiously committed to the OECD’s digital economy work despite this stance on the GILTI.

Ireland is “open to finding a common goal,” said Brendan Crowley, the Irish Department of Finance’s head of international tax, at the Oxford event. “But it needs to be economically justifiable and politically acceptable.”

Balancing Act

Looking to 2020, the OECD faces juggling these demands alongside those of its other members, such as pro-DST France.

Rather than focusing on the overall intellectual argument on tax and the digital economy, Peterson stressed last month that the OECD is simply trying to find points of agreement between countries’ range of political priorities.

“We are in a situation where everyone agrees that there are challenges, but not everyone agrees on what the challenges are and how we then solve them,” he said. Balancing so many political agendas is creating a difficult tension, Peterson added.

Finding points of agreement is the pragmatic approach the OECD took for its 15-action project, involving more than 100 jurisdictions, to curb tax avoidance from multinationals.

Like efforts to reform the taxation of the digital economy, the base erosion and profit shifting project was perceived to target U.S. multinationals. In a May 2017 post on the project, global accounting firm KPMG LLP noted that most of the attention around BEPS from the European media and public has focused on “perceived tax avoidance of U.S.-based multinationals.”

Yet despite the similarities between efforts on the digital economy and the BEPS project, the former is still a greater challenge in balancing complex tax policy with politics.

“With BEPS, there was some” political “interest, but digital marks a step up,” University of Oxford’s Collier, a former partner at global accounting firm PwC, said last month. “We see a lot of discussion about digital as a BEPS issue, and I think that’s the wrong solution and confuses with issues left from BEPS,” he added.

Deadline Nearing

As the 2020 deadline nears, there is certainly scope for external political issues to ratchet tension up again around the digital tax debate in the same way that Trump’s trade-war rhetoric did this year.

For the European Commission alone, its antitrust activity has attracted Trump’s attention within the past four weeks—and it still has a pending government-aid tax ruling on McDonald’s Corp.

Political tensions, then, look set to continue diverting attention from the tax matters arising from the digital economy. Until the OECD’s 2020 report at least, in other words, politics will keep “wagging” the digital tax debate.

To contact the reporter on this story: Ben Stupples in London at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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