IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
The size of the digital economy
The digital economy represents a relevant quota of global wealth. According to Accenture, it counted for 22.5% of worldwide GDP in 2015, with a forecast of 25% by 2020. Facebook totals 2 billion users, while WhatsApp and YouTube more than 1 billion. Similarly, hundreds of millions of customers access Amazon and eBay for their purchases. The giants of the digital economy – the “Over the top”, as they are commonly called – are becoming like virtual states, in terms of number of people connected and wealth creation.
Dealing with the complex and fluid nature of these enterprises has become an issue for many fiscal systems. It is indeed very difficult to identify the value created by digital giants and it appears clear that a one size fits all approach cannot be feasible. Two key questions are “where to tax?” and “what to tax?”. For example, the income earned by Airbnb or Amazon for services provided in Italy should be taxed by the Italian taxman or by the governments where these companies are legally located? Should companies like Facebook (that makes money mainly thanks to advertising) and Amazon (a global online retailer) be taxed in the same way? Situations like this have opened the door to international profit shifting, forms of double taxation and an international debate on the taxation of internet giants.
What about the EU?
Concerning the Old Continent, the Euro Parliament conservatively estimates that the sum lost because of profit shifting is in the range of 50-70 €bn per year. Moreover, according to the Digital Tax Index calculated by PWC and ZEW for 2017, the effective tax rates applied to digital business in the EU28 are less than a half of the rates currently imposed on traditional enterprises.
So far, the EU countries have developed a range of disorderly, ex-post interventions. Nevertheless, at the beginning of September, as the Tallinn Digital Summit approached, Germany, France, Spain and Italy signed a common proposal: the adoption of an equalization levy (similar to the one introduced in India) on the turnover declared by the digital giants. This solution is in contrast to that proposed by the EU Presidency, which consisted in using the market size of a digital company in a given country - estimated through the number of users accessing the services – as a proxy of its created wealth. At the same time, the EU Commission circulated a Communication on “A Fair and Efficient Tax System in the European Union for the Digital Single Market”, where three solutions – partly overlapping those mentioned above - are proposed:
1. Equalization tax on turnover of digitalized companies: a tax on all untaxed or insufficiently taxed income generated from all internet-based business activities, deductible against the corporate income tax or as a separate tax.
2. Withholding tax on digital transactions: a standalone final withholding tax on selected payments made to non-resident providers of goods and services ordered online.
3. Levy on revenues generated from the provision of digital services or advertising: a separate levy could be applied to all transactions concluded remotely with customers residing in a country where the supplier is not resident, but has a significant economic presence.
The various option are still on the table. Fiscal experts don’t like the idea of taxing turnover, while the other solutions proposed lack generality. For example, the withholding tax on digital transactions could work on Airbnb or Amazon, but not on the Twitter or YouTube business models, which are mostly based on advertising. In addition, an approach based on the number of clients, or of accesses to the platforms, is too weak and is hardly correlated to the amount of wealth created.
To tackle this problem, the G20 has asked the OECD experts to present an interim report in 2018, and a solution by 2020: “We know the countries are frustrated, they want to act … but things must be done in a coordinated way” OECD’s tax chief Pascal Saint-Amans declared.
We doubt that asking frustrated national governments to wait, while appointing an organisation to solve the problem, and then imposing the solution internationally is the right way to go. In addition, an important issue that dearly requires to be included in the debate is the fact that the creation and introduction of new taxes are actually the opposite of what is required. Indeed, new taxes targeted at digital business will make Europe even less attractive to international investors. Moreover, we would like European policymakers seriously discuss another, more general, issue: corporate taxation is unfair and inefficient. We believe that abolishing corporate income tax will foster both justice and efficiency.