Digital Tax Policy Accelerating Due to COVID-19
Every day this week, this Disruption and Data blog features details of major policy initiatives that have not been derailed by the pandemic. Mostly, these developments have been lost in the noise in the news cycle. But our PolicyScope platform users and our daily COVID19 Report readers have watched the incremental forward progress on each of these important issues.
Today’s focus is on Digital Services Taxation Policy. Today's post provides first some background, followed by data analysis and inflection point prognosis for 2020.
Digital services (video streaming, advertising – including search engines and social media platforms, data services, e-books, cloud providers, digital productivity services, internet providers, online marketplace platforms, digital communications platforms, research portals, video games) at their inception were not subject to direct taxation. The spectacular rise of e-commerce at the retail level and the creation of a cross-border digital economy means a larger proportion of economic activity migrates to the online sector each year. Over time and at scale, the shift deprives sovereigns of much-needed tax revenue.
Over the last few years, some countries have begun taxing turnover (via gross revenue streams) at the corporate level, usually distinguishing between revenues earned at home and abroad. Before the COVID-19 pandemic hit, these turnover-based digital tax initiatives were generating great controversy in part because they can dis-incentivize companies from growing and in part because the initiatives were perceived as targeting specific companies (usually American digital giants from Silicon Valley).
While European initiatives generating the most headlines and the most heated political rhetoric, national efforts to create digital taxes were not limited to Europe. Canada, India, and Israel also have some version of a digital tax. Differences in taxation types, scope of application, and thresholds across countries (including across European countries) created additional challenges for digital companies and for sovereigns seeking to establish at least a level playing field so that their domestic consumers and companies would not be adversely impacted by inappropriate tax competition.
Tension has been building for over a year. In December 2019, the United States determined that France’s digital services tax constituted an inappropriate and discriminatory non-tariff barrier that was directed specifically to U.S. companies. The proposed remedy was retaliatory tariffs.
Just before the COVID19 pandemic hit Europe, France and the United States agreed a détente. France would forego collection of accrued taxes and the United States would suspend implementation of the retaliatory tariffs pending the negotiation of an international minimum standard under the auspices of the Organization for Economic Development and Cooperation (OECD). The goal was to generate common international standards by year-end 2020, with a few key midsummer meetings.
Then the pandemic hit.
Rather than delay the negotiations, the COVID-19 disruption has actually incentivized policymakers to accelerate their negotiations within the OECD even as other nations have charged forward with unilateral measures.
What The Data Tells Us
The PolicyScope platform has been tracking digital taxation issues since January 2020. The sharp decrease in rhetoric and the extremely low action levels demonstrate starkly the high tensions in January followed by the standstill agreement with negotiations under the (non-public) OECD umbrella. The uptick in April is, of course, of great interest.
As with Brexit, however, momentum is only part of the story. Any activity amid both the pandemic and the OECD negotiations is significant. As we noted last year, words count, but context counts more.
So when the U.S. Secretary of the Treasury and the French Finance Minister sparred publicly in late February around the edges of the Group of Twenty meeting, and activity spiked, PolicyScope platform users noticed before many others and took strategic action.
And when UK policymakers returned from the G20 and began rattling sabers in early March about digital tax policy within the trade context, our system captured it.
Note the low volume level in the charts . Policy activity does not require “big data” to be strategically significant. Sometimes the smallest moves can have a large strategic impact. Anyone following the digital tax lexicon in the PolicyScope platform would have been notified at any point during the craziness of pandemic lockdowns if in parallel policymakers were trying to sneak through some policy shifts.
In fact, due to the simultaneous medical, economic, and humanitarian crises cause by the pandemic, policymakers did not return to these issues until March 31. The PolicyScope platform does not currently capture activity from India. However, when policymakers in India took action regarding digital taxation on March 31, the platform captured the reaction function not only relation to India's move but also subsequent policy statements from European officials:
Notably, Germany’s Finance Minister made clear his preference for finalizing – if not accelerating -- agreement on digital taxation issues in part due to the large fiscal policy implications of finding new revenue sources for sovereigns amid a declining economy: “We must work to ensure fiscal firepower and robust national budgets, in all countries. We must not allow some to avoid contributing their fair share…We must put an end to the harmful race to the bottom on corporate tax rates."
EU Commission Gentilioni followed up quickly and separately, making clear that “we need a digital taxation and we are now working to have it at the global level.”
What Comes Next
Advanced economies spent much of March and April 2020 implementing massive fiscal measures designed to prop up economies dealing with the consequences of fighting the COVID-19 pandemic. Many of those measures included deferring tax collection. The world has never seen the simultaneous shuttering of all G7 economies and parallel supply chain disruptions. Economic value creation has only been possible at any scale through the nearly overnight shift towards a broad range of digital services.
Policymakers everywhere will be keen to replenish treasury coffers as they strive to maintain pandemic-related emergency spending. They will also be keen to ensure that the accelerated migration of economic activity to the digital arena due to mobility restrictions does not further erode tax revenues. Europe may soon find more allies in the quest to tax digital services.
A few clear – and predictable-- inflection points exist, around the edges of planned international meetings. We can expect spikes in activity (particularly leaks and rhetoric) around the edges of the following sessions:
June 16-19: OECD Forum on Tax and Crime
July 1-2: OECD/G20 Plenary
November 21-22: G20 Summit
Because this workstream is so closely tied to pandemic-related economic shifts, it seems highly likely that additional inflection points will materialize as the year progresses. Intensifying economic pressures throughout 2Q2020 could easily increase incentives for policymakers to reach agreement quickly. Unilateral action at the national level can also easily derail nascent consensus-building efforts.
Should volatility spike in this issue area, the PolicyScope platform will be ready to catch it. Stay tuned.
BCMstrategy, Inc. is a start-up company using patented technology to automatically measure and analyze global public policy developments. The company began tracking daily global COVID19 activity in late February 2020, which means the company has captured in its time series the full global reaction cycle for this issue as it occurs. For more information and to get started using the next generation of policy intelligence tools, please visit www.policyscope.io.