Top Policy Trends 2020: Digital Services Tax

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Shifts in 2020

Unilateral moves by an increasing number of countries, particularly European, to raise more tax revenue from digital businesses based on the location of users has put 100 years of stable global tax rules on notice. The shift to watch in 2020 is not only whether the various forms of a ‘digital services tax’ on revenue take hold, but whether a global solution for taxing multinationals in a digitizing global economy gains traction and can restore much needed stability to the international tax system, as well as reducing the risk US trade retaliations.

Pressure for international cooperation is rising as more countries look at their own measures to tax remote activities taking place in their markets. Don’t think of this as a narrow issue, targeting a handful of large digital companies. Proposed global solutions would likely affect all businesses, not just the predominantly IP-based ones, and could prompt a rethink on where to conduct R&D, perform major management functions, or organize supply chains. Tax incentives meant to encourage certain types of economic activity, like R&D credits, may also be on the table as a result.

53% of respondents are “very actively” looking to shape digital services tax policy.

Source: PwC Election 2020 Poll, November 2019

The three influencers

France and UK tax authorities

The UK is among the first to propose a tax on digital services, while France is one of the first countries to implement legislation (with retroactive effect). Other countries have begun to follow France’s lead, including Canada, Italy, and Turkey. The 3% French tax targets internet and technology providers that have revenue in excess of €750 million globally and €25 million in France. It specifically targets two types of companies: those that have a platform allowing users to interact with other users (like dating apps, app stores and online marketplaces) and those that provide services for targeted advertising. The portion of revenue connected with France is determined using a digital presence ratio calculated based on the number of French users actively using the service. The focus on gross revenue instead of net profit makes this tax regime particularly unique and distortive. The UK’s law may go into effect in April (depending on Brexit) and has similar provisions (although slightly narrower scope and a lower 2% rate).

 

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US Treasury

The Treasury Department has lent support to the OECD’s digitalization project. Amid concerns that a unilateral tax will fall disproportionately on large US technology and internet firms, Treasury Secretary Steven Mnuchin laid out the US point of view in September 2018, namely that “tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard.” In addition to the OECD-led project, negotiations with French officials are currently underway regarding the US response to the digital services tax, and Treasury is conducting listening sessions with US companies and others to gain more perspectives on impacts.

 

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The OECD

The Organisation for Economic Co-operation and Development (OECD) operating under a G20 mandate is leading efforts for an international solution and aims to reach an agreed plan by the end of 2020 on a new taxing right that’s based on some amount of profits made in the markets where customers or users are. That the OECD’s project has gained the support of G20 nations, including the US, to carry on means that there is policymaker consensus on the view that current rules dating back to the 1920s may no longer be sufficient.

The OECD Secretariat’s proposal released in October would reallocate some residual profits and taxing rights to countries with large markets. A second proposal seeks a global minimum corporate income tax on profits generated by multinational companies. There is significant complexity in each of the proposals, and in their interaction with each other. Reaching agreement with over 130 economically-diverse countries is always difficult and could stall the OECD’s progress.

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43% of CFO respondents rank taxes on digital services among top 3 policies most impactful to their business.

Source: PwC Election 2020 Poll, November 2019

How to prepare for the shift

Various efforts to craft an international corporate tax system that confers more taxing rights on countries with large consumer markets is not just a matter for tax professionals on either side of the public-private sector divide. Business leaders should team with their tax counterparts now to understand the potential second-order effects on supply chains, innovation, and business models. For example, an export business that manufactures in its home country could face higher taxes in the large countries into which they sell. The outcome may be that the exporter decides to shift manufacturing or service functions to the larger markets in order to avoid double taxation. This is a conversation senior management should be able to have with Economics Ministries, Business Ministries, and Inward Investment Agencies. The OECD project could increase worldwide tax stability and certainty. But it could also go badly astray if business is not constructively involved.

Contact us

Alison Kutler

Principal, Strategic Policy Leader, PwC US

Jon Lieber

Principal, NES Practice, PwC US

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