The recent agreement among the world’s seven leading industrialized countries could signal a shift in international consensus toward the Biden administration’s goal of ensuring that U.S. tech companies aren’t the only ones facing taxes on digital services.
The proposal endorsed by President Joe Biden and his G-7 counterparts in early June would give new taxing rights to countries where companies operate rather than where they are headquartered. The proposal would allow companies a 10 percent profit margin, but a tax on any profit above that level, according to Treasury Secretary Janet Yellen.
The G-7 proposal lacks many specifics, and international tax experts say it’s a long way to a final agreement. But the outline described by officials suggests it will cast the digital services tax net wider than an exclusive club of U.S. multinationals such as Amazon.com Inc., Facebook Inc. and Google LLC.
One complaint about the current regime is that companies earn income from users in countries where the companies aren’t present and thus don’t pay tax. The attraction of digital services taxes is that countries can avoid taxing domestic companies and focus on the multinationals. The multinationals complain that without a global agreement they face a confusing array of taxes with varying thresholds and rates.
The G-7 tax arrangement would apply to the “largest and most profitable multinational enterprises” rather than singling out tech companies — although they are likely to be included. That provision appears to make the proposal less discriminatory and more acceptable to the United States.
Under the proposal, countries no longer would be able to impose separate digital services taxes aimed only at tech companies, and those that have adopted or enacted them would have to end them. The Trump and Biden administrations, with bipartisan support in Congress, have pushed for the elimination of the taxes.
“There’s still, I would say, a lot left to negotiate on the digital taxes,” said Daniel Bunn, vice president of global projects at The Tax Foundation. “The U.S. is fine talking about the project of digitization of the economy and making sure that it’s not just about digital companies.”
Bunn said the U.S. has said the focus should be on large and profitable companies, not on tech companies. Digitization applies not just to tech firms but to ways businesses use technology to move products and deliver services.
Yellen also said the G-7 digital services agreement goes “hand in hand” with a global minimum corporate tax. The G-7 agreed to pursue a minimum corporate tax of at least 15 percent.
The G-7 agreement came as the Organization for Economic Cooperation and Development leads talks on digital services. The OECD in October released a blueprint that is largely viewed as a starting point for decision-making organizations such as the G-7 and the G-20 international forum of governments and central bank governors from the European Union, the United States, China and 17 other countries.
The OECD’s plan would potentially divide companies subject to the tax into two categories: automated digital services and consumer-facing.
Digital services would encompass companies engaged in online advertising, online gaming, cloud computing services, social media platforms and digital content streaming. It appears to apply to most U.S. technology companies, which don’t rely on a brick-and-mortar presence to reach customers.
The consumer-facing category would include some traditional companies that now use websites, online portals and mobile apps for targeted marketing and branding. They sell goods or operate under licensing agreements in the hotel or restaurant industries.
By expanding the potential pool of affected companies beyond only tech companies, the OECD moved closer to the United States. Washington has proposed that taxes be aimed at the 100 largest and profitable companies in the world, regardless of whether they are digital companies. While the biggest U.S. technology companies are among the most profitable global companies, so are many others, including U.S. financial institutions.
The G-7 agreement appears to move some key nations closer to the U.S. proposal.
Bunn said an agreement in principle could be reached in months, but the details will take much more time. And he said Congress would have to change tax law and act on a tax treaty if there is an agreement related to digital taxes.
U.S. Trade Representative Katherine Tai is using six digital services tax cases to prod trading partners to stop the proliferation of the taxes and devise a workable, standardized alternative. The six countries take different approaches in levying the tax.
Italy and the United Kingdom, as G-7 members party to the agreement, are also among the six countries the U.S. has said it will take action against if there is no global agreement this year. Tai announced on June 2 that she would delay imposition of 25 percent tariffs on selected goods from the six countries — Austria, India, Italy, Spain, Turkey and the United Kingdom — for 180 days to allow time for an international compromise that does not discriminate against U.S. tech giants such as Google and Facebook.
The Office of the U.S. Trade Representative determined under Section 301 of a 1974 trade law that the six countries’ taxes are discriminatory and designed to target U.S. technology companies.
France, a G-7 member, also faces a 25 percent tariff under Section 301 on an estimated $1.3 billion in goods. The Trump administration put the tariff on hold, and the Biden administration has continued the delay.
The U.S. has warned another G-7 member, Canada, about its plan to enact a 3 percent tax on company revenue above $20 million that comes from digital services that rely on the engagement, data and content contributions from Canadian users. Canadian Finance Minister Chrystia Freeland said her country still plans to implement the tax on Jan. 1, 2022, while work to finalize an agreement continues.
Finance ministers from G-20 countries are scheduled to meet in Vienna in July and issue a proposal on digital taxes. A 139-member working group of governments known as the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting will review the G-7 and G-20 proposals with a goal of narrowing options and devising a policy.
The OECD would be responsible for coming up with the technical details countries would need to move ahead with changes to their tax laws and likely tax treaties.
Megan Funkhouser, director of policy, tax and trade for the Information Technology Industry Council — which represents many large digital companies, including Google, Microsoft and Oracle — said the OECD working group is crucial.
“We hope they uphold the G-7 ministers’ commitment to remove all digital taxes, which should happen at the time of political agreement to avoid further fragmentation of the international tax system and adverse implications for all industries that do business across borders,” Funkhouser said.
Matthew Schruers, president of the Computer & Communications Industry Association, which also represents large computer and digital companies such as Amazon, Intel and Facebook, said varying digital tax rates are a drag on international business as long as they exist.
“A new framework will be key to ensure international stability and economic recovery. However, the work is not finished until the digital taxes that unfairly target U.S. businesses have been removed,” Schruers said.