A digital services tax can take several forms, but most commonly is a tax levied on digital platform services and the advertising revenue generated by users. More simply, foreign governments levy DST to capture revenue from digital platforms. For example, when an Indian citizen accesses Facebook, the advertising dollars they generate go back to Facebook and its U.S. headquarters, and a DST would seek to capture some of that revenue for the Indian government.
Digital services tax rates vary from 2-7.5%, and generally apply only to companies that have a certain level of global and in-country revenues. The most common European Union model, for example, levies a 3% tax on companies with at least €750 million in global revenues, and €25-50 million in domestic revenues. India’s DST, adopted in March 2020, levies a 2% tax on non-resident companies with more than Rs.20 million in global revenue. The minimum revenue requirement for these taxes by nature target U.S. tech giants, which have both the market size and global footprint that allow them to generate such high profits.
Despite these high levels of profit, most U.S. tech giants pay low tax rates relative to other multinational corporations of the same size. Thus, foreign governments levy DST as a way to capture revenue from the dominant foreign tech platforms, and protect local industries from foreign digital competition.
The European role in shaping the DST discussion and the U.S. response to DST
In response to rising popularity of DST around the world, the U.S. initiated Section 301 investigations in June 2020 against ten of its trading partners who have implemented or proposed a DST: Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.The USTR’s June 2020 Section 301 investigations note concern that DSTs “[discriminate] against U.S. tech companies” and may “[penalize] technology companies for their commercial success.”
With the exception of Brazil, Turkey, and India, the majority of these Section 301 investigations focus on European Union countries. This makes sense, given the EU’s hardline tactics against U.S. tech platforms, especially under Commissioner for Competition Margrethe Vestager, widely known for her assertive anti-trust maneuvers against tech platforms in the EU.
Notably, the USTR had already initiated Section 301 investigations against France in July 2019, following France’s announcement that it would levy DST against tech platforms. Accordingly, this tax became known as the “GAFA tax,” for Google, Amazon, Facebook, and Apple. However, France backed down on its plans to collect these taxes in 2019 following the response from the U.S. that they would raise tariffs on French exports like wine, cheese, and other popular goods. On June 17, 2020, USTR Robert Lighthizer announced that the U.S. had pulled out of DST negotiations with the European Union as talks stalled.
OECD tax rules and the digital economy
The Organization for Economic Co-operation and Development (OECD) traditionally stipulates that tax should be levied based on where a company has physical presence, as ZDNet reports. However, problems arise in the digital economy, where the borderless nature of the Internet, and increasing numbers of users connected to digital platforms around the world obfuscate the definition of “physical presence.”
In response, the OECD isdeveloping a separate tax framework for the digital economy, addressing challenges around taxing multinational companies whose customers are often thousands of miles and borders away from where the tech company has their headquarters. Virtual OECD digital economy negotiations are scheduled for October 2020, following a delay related to COVID-19. Both the U.S. and China, home to the world’s largest tech giants, are proponents of a digital taxation framework that favors the digital economy; that is, without DST. Many European Union countries, including France, have deferred implementation or collection of a DST until an OECD agreement is reached.
From one angle, a DST makes sense: you, as a government, need revenue, especially following the economic fallout of COVID-19. In the attention economy, every minute a citizen spends on a platform headquartered outside of your country is a “dollar” of attention not spent on domestic platforms or domestic issues. However, because digitization is a new issue, digital taxation and trade are also emerging fields, and thus many tech platforms are not taxed at the same level as their brick-and-mortar counterparts. What are you, as a foreign government, supposed to do when your citizens are spending all their time on Facebook?
U.S. tech platforms are sometimes perceived as being under-regulated and under-taxed relative to the influence and footprint they have. This is what has led to their meteoric rise, both domestically in the U.S. and abroad. Digital services taxes make sense as a “band-aid” for a much thornier issue that will not be fixed by taxing advertising revenue made in-country: increasing polarization and information warfare conducted on these platforms.
Global polarization and the impact of DST
Disinformation and misinformation are and will be the conflicts of the 21st-century polarized world. Information warfare results in confusion for citizens around the globe, which erodes trust in citizen-government relations and weakens democratic systems. Tech giants, with their open and generally unregulated systems, offer perfect platforms for malicious agents to conduct this information warfare, raising concern and alarm for governments everywhere. At a time when governments and tech platforms should be coming together to combat information warfare, DST further polarize relations between these two entities. Governments that implement these taxes introduce friction into their relations with tech companies at a time when collaboration should be prioritized.
Some may bristle at the concept of equating a private U.S.-owned company with a government. But the reality is that tech platforms, in many cases, have more prominence in the daily life of the average citizen around the world than governments. Think about how many touchpoints you have with a digital service or platform provided by Facebook, Amazon, Apple, Netflix, or Google every day, versus the touchpoints you have with your local government. That’s not even including the tens of thousands of websites run on AWS, Amazon’s cloud computing breadwinner.
A call to action
In the 21st-century world, tech platforms are here to stay. Governments and their diplomatic corps, therefore, should do everything they can to collaborate and cooperate with major tech platforms, and vice versa. Tech platforms, therefore, also cannot miss the mark in underestimating their own power in shaping democracy, diplomacy and political discourse.
The increasing impact of digital platforms and data privacy now prominently feature in conversations about the future of democracy. Democratic governments and tech companies urgently need an actionable framework for digital cooperation, especially with the rise of dual-use technologies like facial recognition and artificial intelligence. Both governments and tech companies must take responsibility for their own spheres of influence and explore all possible pathways to cooperation, in order to combat and dissuade the many forces conspiring to erode the pillars of democracy and citizen governance around the world.