By Jack Mintz, October 15, 2020
A decade ago, the G20 countries asked the OECD to study limiting corporate tax base erosion and profit-shifting (BEPS) in order to shore up global corporate tax revenues. On Monday, the OECD put out its umpteenth BEPS study, this one focused on digital taxation. Public consultations will conclude in mid-2021, after a new government is installed in the United States.
With the acceleration of digitization, especially during this COVID economy, the OECD’s work has taken on greater interest as countries seek to grab a bigger share of tax revenues from highly profitable digital companies.
The OECD’s great concern is that countries are embarking on a world tax war as more and more of them impose unilateral “digital service taxes,” so far in amounts ranging from three to five per cent of their total tax revenues. The U.S. believes it alone is entitled to tax the profits earned by its innovative digital companies and is responding with tariffs on imports from countries, like France, that have imposed digital taxes. The OECD estimates the distortions from an uncontrolled digital tax war could cost up to US$1 trillion, equal to 1.2 per cent of global GDP, which would obviously make the post-COVID recovery more difficult.
You might ask how a sales tax has anything to do with a profits tax. It doesn’t. The digital services tax is a presumptive tax in lieu of corporate income tax paid in the country. If digital companies simply shift the tax by raising its charges to advertisers or consumers in a country, the tax won’t be paid on profits at all.
The OECD’s goal is to figure out how countries can get more corporate tax without a digital tax war. Two complex “pillars” are suggested.