Digital Services Tax (DST) Plans Outside the US

New ways of doing business often challenge tax rules written for a different model. That is a concern expressed for many years by several countries. The concern is that it looks like companies that make money by other than selling tangible goods are profiting by activity in the country, but have no permanent establishment in the country, so owe no income tax. For example, a search engine company makes money when someone uses its search engine because it provides data to the company. And if the user clicks on an ad, the search engine company makes money. But no tax revenues go to the user's country.

The OECD, European Commission and others have been studying this for many years. The AICPA recently released a policy paper that explains the topic, issues and lists what some countries are doing or proposing. See AICPA Policy Report – Taxation of the digitized economy: A policy paper designed to educate, enlighten and stimulate discussion (October 2018).

The UK has also studied this issue and solicited comments on its suggestions. It now proposes to start a Digital Services Tax (DST) in 2020. In November 2017, the UK government released a discussion paper – Corporate tax and the digital economy: position paper; later updated in 2018. The position is that “a multinational group’s profits should be taxed in the countries in which it generates value.”  Also see the UK policy paper – Digital Services Tax: Budget 2018 brief. It states:

 “The DST applies a 2% tax on the revenues of specific digital business models where their revenues are linked the participation of UK users. The tax will apply to: search engines; social media platforms; and online marketplaces. That is because the government  considers  these business models derive significant value from the participation of their users.”

The UK DST will only apply to businesses with at least £500 of global revenues ($650 million USD).

Congressman Brady, Chair of the House Ways and Means Committee, stated his opposition to the UK DST – On 10/31/18, he released the following statement:

“The United Kingdom’s introduction of a new tax targeting cross-border digital services – which mirrors a similar proposal under consideration in the European Union – is troubling.  Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab. 

“The ongoing global dialogue on the digital economy through the OECD framework should not be pre-empted by unilateral actions that will result in double taxation. If the United Kingdom or other countries proceed, that will prompt a review of our U.S. tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets.”

Spain has also proposed a DST of 3%.  See DLA Piper Global Tax Alert 11/1/18.

Is a new tax the answer? Can existing income taxes be modified to address where income is generated? How easy it is to know where income is generated? I think technology makes it possible to know the location of the person clicking on a social media ad. The harder question might be where is that income generated for tax policy purposes. That has been a longstanding multistate question - where the costs of performance occur or at the destination, or perhaps some combination?

What do you think?

French Task Force Report on Taxation of the Digital Economy

In January 2013, a task force commissioned by the French Finance Ministry, released a "thinking outside of the box" report on new suggestions for taxation in the digital era. This 188 page report was only recently translated into English. Co-author of the report, Nicolas Colin, has allowed me to post this English version on my blog - here.  You may have seen Mr. Colin's summary of the report he posted on Forbes blog in January 2013 ("Corporate Tax 2.0: Why France and the World Need a New Tax System for the Digital Age").

I'm still reading through the English report, but wanted to share an introduction to the report now. I refer to the report as "out-of-the-box" thinking because the authors raise some points that I have not heard discussed elsewhere. Also, an economic shift, such as from the industrial era into the digital or knowledge era, should lead to some rethinking of tax systems - are they are in need of modernization (hence the title of my blog - 21st century taxation).  When we have bits and bytes moving across borders, perhaps the tax rules need to be different from the existing ones focused on moving widgets across borders.

I think the report will lead to a broader discussion of what international taxation should look like today.  Certainly, there is a lot of discussion going on regarding this topic in Congress and the OECD.  For example, Congressman Camp, chair of the House Ways and Means Committee, has a proposal to move to a territorial system. In February 2013, the OECD issues its BEPS report (Base Erosion and Profit Shifting) which should get further discussion by the G-20.

Well, back to the French report ... Three key themes/ideas:

•  Today, some companies, such as Google, can gather lots of data from citizens and companies in a country, but do not have tax liabilities there, even though it looks like they are at least virtually present. So, consider redefining permanent establishment for the digital age. Perhaps places where data is generated for use by the company should be a PE.

• Alternatively or prior to a PE change, consider a Pigovian tax on use of resident’s data if the company does not “comply with stronger privacy and user empowerment requirements” (aim is also to encourage the company to so comply so they won’t owe the tax).

• Reform R&D tax rules and definitions to better focus on the digital economy and its growth.

I had the opportunity to talk with Mr. Colin in October 2012 when he visited Silicon Valley to meet with people to discuss his ideas and learn more about the digital economy from perspectives of folks here. We had a very enjoyable discussion.  And it helped me think of a few tax ideas to explore. Be sure to see Annex 2 of the report for a long list of people the authors consulted with including the tax director of Google.

I encourage you to review the report. It addresses issues that we will likely hear more about from Congress and the OECD and that are important for reform of the U.S. tax system.

What do you think? Any "out of the box" ideas you have for a sound tax system for the digital era?