The digital economy might still be at an adolescent stage, but it is already huge, and it will continue to grow rapidly. Twenty years ago, Amazon was still a start-up, Facebook did not exist, and Apple did not have the market capitalisation that it has today. However, these companies are now global juggernauts and along with several of their other American and Chinese peers, are disrupting traditional approaches to business, public and private life.
According to Nadina Iacob and Felice Simonelli of the Centre for European Policy Studies (CEPS), the rise of digital business models is laying bare the main limitations of traditional tax systems and may well have some implications for national tax revenues. This is largely because traditional tax systems link taxation to the location where all or part of business activities are physically carried out. The problem for national tax administrations where digital businesses are concerned is that their business model allows for them to engage in commercial activity in countries where they have little to no physical presence. Therefore, they are often able to dodge the tax net of many countries.
At the end of 2019, under the guidance of Pascal Saint-Amans, Director – Centre for Tax Policy and Administration at the Organisation for Economic Cooperation and Development (OECD), the OECD forged ahead with plans to overhaul global tax rules, particularly with a view to address profits generated by tech firms globally. Among the initial suggestions was for there to be a minimum global corporate tax rate that all companies must pay, irrespective of where they operate. Participants in this process are hoping to reach a deal by the end of 2020.
Notwithstanding efforts at the OECD level, several countries and groupings have been moving ahead in their attempts to tax the digital economy. For instance, in 2018, the European Commission (EC) put forward two proposals for fair and effective taxation of the digital economy. The first proposal sought to introduce a 3 percent digital services tax (DST). The second proposal required an updating of the concept of ‘permanent establishment’ to account for a ‘significant digital presence’. A proposal such as this latter one would ensure that digital firms would find it more difficult to exploit loopholes in existing taxation regimes which focused almost exclusively on firms with a physical presence in a given jurisdiction. In Australia, the government introduced a general consumption tax (GST) of 10 percent on sales of low-value goods by non-resident e-commerce companies. In Barbados, the government recently announced that the value added tax (VAT) would be applicable to e-commerce sales. These initiatives are being implemented out of a genuine concern by governments that they are missing out on millions and billions of dollars in revenue from companies that conduct business online.
A report by the non-profit Fair Tax Mark claims that between 2010 and 2019, using legal tax avoidance strategies, the taxes paid collectively by some of the biggest American tech companies across all global territories in which they operate was $155.3 billion less than what the actual tax rates would have required. If given a choice, most of us would perhaps choose not to pay taxes.
However, taxes are the lifeblood of any society. Each dollar in taxes unpaid means one less educated child, one less nurse and one less paved road. Against this backdrop, it is only fair that like every ordinary citizen who must pay his or her taxes, global billion-dollar firms should also pay their fair share of taxes.
I am not certain of the extent to which any Caribbean country is involved in the OECD-led efforts which currently have over 130 participating states. However, given the complexity of the situation with respect to taxing digital firms, a global compact might be the best solution and it is important that small states are able to lend their voices to these efforts. Furthermore, there are also options available to countries domestically which could involve the application of VAT and GST to e-commerce transactions and this might be a good place to start.