Taxation and the Digital Economy: Closing the Loop

The digital economy grows faster than policy-makers can legislate for taxation, just as the public is paying more attention to these matters. Policy Analyst Matt Allison takes a look at recent initiatives to maximise revenues, and examines policy-makers' motives.

Policy Analyst Matt Allison closely monitors the regulatory environment around taxation.   We leverage our contacts and expertise at the national and multilateral level to shape outcomes.

The rapid growth of the digital economy in recent years has outpaced policy-makers’ ability to legislate for fair and efficient taxation. On the back of the global recession, and faced with slow growth, governments are being tougher on tax avoidance and aggressive tax planning. They, and their publics, are demanding that companies should be made to pay their ‘fair share’ of tax.  While the tax minimisation structures employed by many tech firms are legal, policy-makers feel pressure to close loopholes in the international tax system.

Several initiatives are underway to increase government revenues from the digital economy (and other industries).  The feeling for some is that these initiatives are targeted at large US corporations, and fit into a broader campaign by European policy-makers to curb the influence of Silicon Valley in favour of their own industry.

The OECD has published, for example, the Base Erosion and Profit Shifting (BEPS) plan. The objective of the BEPS plan is to align taxation with the location of the relevant economic activity and value creation, preventing companies from artificially shifting income to lower-tax jurisdictions. While technology companies are not the focus of this work, a large part examines how the intangible nature of value creation which underpins the growth of the digital economy has exacerbated these phenomena.  While the guidance is not binding, OECD members have been willing to engage in the process so far, and can be expected to bring forward implementing legislation.  The initiative has been led by European countries.

In January 2016, the European Commission unveiled the Anti-Avoidance Directive to implement the BEPS action plan. The essence of this work is coordinated country-by-country reporting, a framework for tax authorities in different countries to share the information they have about a given company’s tax structures, in order to make it more difficult to exploit loopholes between tax regimes to shift tax liability away from the jurisdiction of the economic activity which generated the profit.

Earlier this year, Google were hauled over the coals by a UK parliamentary committee for a tax settlement it had reached with Her Majesty’s Revenue and Customs.  After initially welcoming the settlement, Chancellor George Osborne has since indicated he is willing to back more rigorous country-by-country reporting.  The same man introduced the Diverted Profits Tax (DPT), dubbed the ‘Google tax’, in April 2015.

Aware of events like these, US Treasury officials have suggested that the EU is unfairly singling out US firms for sanctions, while welcoming the principle of tax transparency and fairness. Similarly, in early 2015, law-makers in the Congressional Ways and Means subcommittee argued that the “highly subjective standard set by the OECD seems to unnecessarily target American companies”.

Some tech companies reach the same conclusion – but it is important not to.  From where we stand, the desire to maximise tax revenue is for its own sake, rather than being part of an anti-Silicon Valley agenda.  Misconceiving the intentions behind efforts to update global tax rules may lead firms to pursue unnecessarily defensive, or confrontational, public affairs strategies to combat them.  In doing so, they could ultimately increase exposure to sanctions or damage their reputations with the public and policy-makers alike.

Our experience is that engaging in transparent, open dialogue with policy-makers and regulators, combined with an understanding that tax rules need to be revised to keep pace with change, will produce better outcomes for firms.

Technology companies must become partners in this process to ensure that new rules are proportionate and implementable.  Above all these efforts must be international and harmonised; piecemeal change will only exacerbate the gaps which exist in the global tax system, allowing laggards to undercut those countries adopting best practice. This hurts companies, too: a fragmented and inconsistent global tax regime will be costly and burdensome to implement. Active participation from a variety of stakeholders, in a coordinated fashion will allow us to ready the tax system for the next wave of innovation.

Access Partnership closely monitors the regulatory environment around taxation, and can leverage our contacts and expertise at the national and multilateral level to shape outcomes.

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