Numerous conversations have taken place around how businesses should be taxed in the digital economy. In my past two blogs, we’ve looked at this discussion from a tax point of view, analyzing why business leaders should care as well as the positive and negative aspects of the proposals on the table. But there’s more to this issue than the technicalities and their importance to business. While I would never claim that tax drives business decisions, it truly does play a part in them. And, as result of that, tax can be a growth accelerator — or put the brakes on growth.
But don’t take that from me. PwC recently surveyed three hundred business executives across North America, Europe and Asia-Pacific — with half surveyed representing companies that have employees and customers in more than ten countries. The goal of the survey was, in part, to better understand the digital economy and to analyze the impacts of both existing and potential tax legislation in this space. The results of the survey demonstrate that we need to think about digital tax issues not just in the context of tax collection, but also more broadly in what their impact will be on markets, consumers, and research & development (R&D). In other words, digital tax is important to the whole economy, not just businesses.
Let’s look at three key takeaways from the business leaders:
One major finding: national tax policy matters. More than 80% of business (rather than tax) executives — across automotive and manufacturing; consumer goods, wholesale and retail; healthcare, life sciences and pharma; and technology and telecom — agreed that a country’s decision to tax their activities more highly than other countries would impact their decision of where to invest (led by almost 90% of Automotive and manufacturing, and 86% in Healthcare, Life Sciences and Pharma). Moreover, most have already cut markets loose due to burdensome regulations or taxes. Respondents cited lack of consistency as the primary culprit, with nearly three in four executives (74%) saying they have been driven to exclude customers due to differences between regimes making compliance too difficult and/or expensive (including 91% in Tech and Telecommunications, and 85% in Consumer Goods).
Our study found small businesses four times more likely to leave markets based on tax than large companies (20% as opposed to 5%). Additionally, over 50% in each of the small, medium and large business segments said while they would continue to serve the higher-cost market, they would also attempt to change the nature of activities to minimize the applicable taxes. Furthermore, we found that if new taxes are levied specifically on digital activities after companies have already invested, about two-thirds of executives (64%) say their organizations would pass those costs onto users, with only 30% saying they would bear the costs in full. This finding was highest among those surveyed in the Consumer Goods and Retail sector, with 69% of respondents saying they would pass the cost on (and 44% of those respondents saying that, in addition to passing on the cost, they would also consider reducing or eliminating investment). Inevitably this additional cost passed on will fall most heavily on those, including startups, in the small business segment.
While executives most often choose the quality of the product or service they offer as their top value driver for generating revenue (22%), R&D (which came in second at 18%) is actually more important as a value driver when considering executive’s top three choices (60% vs. 48% for quality, with trade secrets/know-how at 37% rounding out the top three). The importance to executives of R&D spend, versus, for example marketing, really shows how early in the cycle of digital expansion we still are. In other words, we’re still in the process of innovating. So, while we all accept the need for governments to raise tax revenue, digital taxes (especially on turnover) could adversely affect this R&D spend and the growth it drives because a turnover tax bears little or no relation to profit and value creation, while a digital PE may reduce the reward to R&D, and, therefore, the incentive to invest in it.
Another impact of a turnover tax relates to the collection of data, which is considered very important by top business executives — but often not because it directly results in immediate monetization. Rather collecting data is critical for driving improvements in products and processes within the business which ultimately, but almost never immediately, drive higher productivity and profit. But, as the term suggests, “big data” obviously requires the gathering of lots of data, much of which may never be valuable. But taxing the data without regard to how and when and what (or whether) elements become valuable, could lead to less data being collected regardless of whether it has value potential, which is never the goal. This in turn will reduce efficiency. This is particularly noteworthy in the Automotive and Healthcare industries, with 55% and 61% of respondents agreeing with the importance of data collection for improving services and products. Returning to one of the earlier points, how or whether data is taxed will impact a business’ decision to invest in a market.
So it’s easy to see that businesses aren’t the only ones with a horse in this race. The proposals currently being discussed will directly impact economies and customers, including startups as well as end consumers.
This is business leaders speaking, not tax professionals, so citizens (and governments) need to understand that digital taxation is not just about tax revenue, but also investment and jobs. I wrote previously that businesses need to be involved in these ongoing discussions, advocating, explaining, and educating national governments and international organizations on the consequences. But governments should be just as involved, working with businesses to ensure their economies — and the jobs and investments that citizens need — don’t suffer as a result.
Tax Services, Washington National Tax Services, Tax Reform, Tax Technology, Private Company Services, PwC US
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