US government reneges on digital company tax agreement with the OECD

via Flickr © 401(K) 2013 (CC BY-SA 2.0)

via Flickr © 401(K) 2013 (CC BY-SA 2.0)

  • Unilateral withdrawal surprises and angers many countries
  • Action highlights the difficulties of global agreements where the Internet is concerned
  • National sovereignty militates against concerted action to force Amazon etc to pay proper share of taxes
  • Overarching "Digital Authorities". Needed or just another layer of slow-moving bureaucracy?

Late yesterday (UK Time) the US abruptly announced that it has withdrawn from long standing negotiations with European nations over the format and introduction of a proposed globally applicable tax to be levied on digital companies. As the announcement was made the US Treasury Secretary, Steve Mnuchin issued a letter saying the talks were in deadlock and that "no progress" has been made.

This analysis came as a surprise to the Europeans as, hitherto, they had been led to believe the matter was progressing steadily and was close to resolution and ratification. The French Finance Minister, Bruno Le Maire, was particularly exercised by the surprise withdrawal on the part of the Trump administration, and probably spoke for other European countries as well as his own when he said, "This [Mnuchin's] letter is a provocation. It's a provocation towards all the partners at the OECD (Organisation for Economic Cooperation and Development) when we were just centimetres away from a deal on the taxation of digital giants". But then history tells us centimetres can be vitally important where rapid pull-outs are concerned. 

For long years now the European Union has argued that the likes of Amazon, Apple, Facebook and Google pay nowhere near the amount of tax they should do in the countries where that actually do business because they routinely move their profits around the world, from tax haven to tax haven, from low-tax environment to another low-tax environment as they seek to minimise what believe they should owe, or can get away with paying.

The US believes that the EU (and the UK) targets its digital companies unfairly and has always opposed the imposition of taxes on them unless and until an international agreement, that would have some reciprocal effects on other digital companies in states that are members of the OECD (of which the US is one), is in place. 

That agreement was very close and while OECD was negotiating it several individual European countries, including France, which had enacted new laws that would result in digital companies paying more tax, agreed to suspend their application whilst talks on a global tax system were in progress. The French government rate of tax on digital companies is set at three per cent - at present - and the unilateral US action has stymied the introduction of a worldwide regime for the foreseeable future and caused ructions around the world.  

France, Italy, Spain, France and the UK have already sent the US Treasury a jointly-signed letter reiterating their support for the deal with the OECD to be enacted forthwith. And good luck with that. Bruno Le Maire says that whether or not the US side returns to the negotiating table, France will impose new digital services taxes on US companies "within the next few months". As usual, the Trump administration reached for its financial knobkerrie and got its retaliation in first by threatening to clobber France with swingeing new tariffs. And so yet another trade war looms.

Big digital companies face increasing pressure to pay up - but will fight back

Whatever the real reason behind the US action is, the abandonment of the digital tax deal with the OECD is yet another example of how difficult, indeed how practically impossible, it can be to reach global agreements where the Internet is concerned. It's the same with regulation. 

In a telling phrase, Mark Zuckerberg yesterday highlighted a particular quandary Facebook has as the 2020 US presidential election gets closer. Since before Donald Trump was elected in 2016 Facebook has been castigated for allowing the publication and dissemination of false information in political advertising. Last time around Facebook did next to nothing to prevent it, this time though users will be able to turn off or block such advertising. Zuckerberg said he would do this, and intimated that he had been forced to do so "in the absence of government regulation". However, Facebook will still not fact check political content no matter whence it emanates.

Last month, for the first time, Facebook went so far as to flag a welter of Trump tweets about postal ballots as incorrect and misleading. The result, as explosive as might be expected, was that the president issued an executive order that will negate legal protections enjoyed by social media platforms that are not available to other media outlets. It's a fraught area and is fuelling further debate about whether or not the Internet should be subject to greater governmental oversight and regulation. 

When it comes to regulating online content there is no international agreement on how states exercise their jurisdiction, what kind of content should be considered abusive, when or whether Internet companies should be responsible for their users’ content at all, how or if they should remove content considered beyond the pale, who decides where the pale is and whether such removals should be global or limited in scope to a particular region or country.

It is a seemingly intractable problem because politics, socio-economics (and often religion as well) taken in the context that each state jealously guards its own sovereignty means that an international accord that would manage all Internet issues in a way that would be acceptable to the likes of the EU, the US, the UK, Saudi Arabia, Russia and North Korea is as unrealistic is it is attainable.

However that's not to say that pursuing a basic framework of agreed common international guidelines should be abandoned. But it's a hard ask because it would require input from nation states, web companies, the technical community surrounding and within the Internet, individual users rights and the requirements and norms of civil  societies - hence renewed emphasis on regional governance and regulation. Just last year, the Select Committee on Communications Committee British House of Lord recommended the setting up of a "Digital Authority' with the remit to "assess regulation in the digital world and make recommendations on where additional powers are necessary."

Meanwhile, and as usual, the focus is on, literally, following the money. Recently, countries across Latin and South America have been looking ever more closely at how to tax tech giants on revenues earned in their territories. This has added to the concerns of the US government because such proposals, just like those being mooted in Europe, Australasia, Africa and other parts of the world could potentially take billions in revenues from Amazon et al (and by implication from the USTreasury), and deposit them into the depleted coffers of individual countries.

It's a fact, amplified by the corona virus pandemic, that digital services are taking the place of physical ones as e-tailers and Internet sites continue to replace bricks and mortar establishments. These changes are affecting governmental tax collection as factories, offices, shops and other organisations close.

Revenues derived from property taxes are in decline and will fall further as enterprises close regional offices and even shutter their corporate headquarters as the majority of staff now work from home, probably forever. In London, the price of office space is plummeting as companies, quite literally, vote with their feet and head for the hills to live out the post-Covid19 future away from the metropolis. What's more, payroll taxes collected on the salaries and wages of workers collapse as the digital economy results in fewer jobs being available.

Many countries now regard the big digital players and platforms as their next source of sustainable tax revenues and, despite what will no doubt be a prolonged, nasty and convoluted fight back by the usual suspects and their supporters, change will come. Amazon and the rest have had a good long run while not being subject to much regulation but the time is coming when individual nations and/or those in trading blocs will demand their rightful share of digital company tax revenues.

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