How not to tax digital
This editorial appeared in The Washington Post. E uropean nations are taking aim at U.S. technology companies with a cash-grabbing proposal that could set off another trade war. Now the world needs to find a way out. France has hit Google, Apple, Facebook, Amazon and other mostly U.S.-based firms with a 3 percent “digital services tax,” and the Trump administration could hit back with tariffs following an investigation into whether the move violates international rules. Others across the Atlantic appear poised to follow France’s lead: Britain has proposed a similar 2 percent tax on revenue earned by social media sites, search engines and online marketplaces.
Advocates abroad for this digital services tax present their case as a question of companies not paying enough in taxes, period. But that’s another fight. At the core of this debate is who should collect the corporate income taxes that companies do pay — not how big the pie is, but how big each country’s slice should be. Europeans’ answer, it seems, is merely that their slices should be bigger.
Certainly, the world has changed since the rules on taxing multinational corporations were written. Today, it is easy for a company to have an economic presence in a country that is disproportionate to its physical presence, the metric used to assess corporate income taxes.
This is the reality the Organization for Economic Cooperation and Development is grappling with as its members attempt to come to a compromise that satisfies both the United States and its tax-hungry peers. The proposal with the most traction reaches beyond tech firms to ask the more general question of how to rethink taxing rights to consider where a corporation’s consumers are located rather than only where the company is located.
In an economy that is becoming increasingly digitized, it makes no sense to try to carve out some exception for one especially “digital” sector. Encouragingly, countries at this last week’s Group of Seven summit seemed open to a broader approach.
An arrangement that satisfies everyone might prove elusive, and some countries, including the United States, might prefer to forgo any rejiggering. But leaving France and its cohorts to act alone could create a hodgepodge of policies in which some companies pay taxes on the same earnings twice and, more dangerously, countries compete in a game of tit-for-tat that leaves everyone worse off. The only solution is to act together.