OECD weighs in on digital taxation saga

The Organisation for Economic Co-operation and Development (OECD) has put forward its own proposals on new tax regimes in the digital economy as the threat of fragmentation lingers.

With the proposal now open to public consultation, the OECD will make the relevant adjustments over the coming months. While this does look like a reasonable approach to creating a fair taxation landscape, there will of course be objections, perhaps from the US and those countries which cultivate the creative tax strategies which exist today.

As it stands, multinational corporations are able to shift tax payments to cheaper locations and regions, as many tax laws are defined by the physical presence of the company. With more businesses employing digital business models, this presents a greater risk moving forward. Big Tech are of course some of the biggest profiters of the inability of regulation to keep up with technological progress. In theory, the new rules will make tax avoidance much more difficult.

“We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020,” said OECD Secretary-General Angel Gurría.

“This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal; ensuring all MNEs [Multinational Enterprises] pay their fair share.

“Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen.”

This is perhaps the biggest worry for the OECD and enterprise organizations around the world; failure to introduce new rules will lead to a much more regionalised approach. This would create difficulties for everyone involved.

The aim is of course to provide more stability and certainty in the international community, though there are a couple of elements to the proposal which are critical.

First and foremost, while these new rules will be applicable to every organization, they have seemingly been designed with digital front of mind. The proposal creates new marker definitions removing the necessity of a physical presence in a market to create tax liabilities.

“The new nexus rule would address this issue by being applicable in all cases where a business has a sustained and significant involvement in the economy of a market jurisdiction, such as through consumer interaction and engagement, irrespective of its level of physical presence in that jurisdiction,” the proposal states.

Revenue threshold levels will be created dependent on the size of the market in question. The OECD hopes this will encourage innovation while also removing the ability to dodge tax through working with third-parties and local distributors.

While this is a much more reasonable approach, designed for the digital economy, there are a few issues which need to be ironed-out, and it won’t be long before the objections to the plans are aired. One area where more thought will have to be applied are the double-taxation clauses; the OECD needs to ensure the concept of fair and reasonable works both directions of course.

What you might also see over the next couple of weeks are objections from countries like Ireland and Luxembourg who benefit so handsomely from the status quo, and perhaps the US who feels it should be the only country allowed to tax the residents of Silicon Valley.

Although there also has been some criticism levelled at the OECD for creating a proposal which favours the wealthiest countries not taking into consideration the developing regions, this is a step-in the right direction. Tax rules were woefully outdated, leaving ample opportunity for abuse. Timelines are short, but this is progress.

Macron softens digital tax stance after Trump lunch

The US has proved it can still throw its weight around the international community as French President Emmanuel Macron has taken a softer-stance on the country’s Digital Sales Tax.

Following lunch with President Donald Trump, Macron has stepped-down the aggressive moves against Silicon Valley and the creative accounting practices which has deprived countries around the world of valuable tax revenues. France took the brave step-forward to tackle the suspect status-quo, though it seems the threat of US tariffs was enough to ease the position of Macron.

“We’ve done a lot a work on the bilateral basis, we have a deal to overcome the difficulties between us,” Macron said to reporters following his meeting with Trump at the G7 Summit this weekend.

A lot has been said this weekend, though most of it avoided the technology, media and telco industry. This is perhaps the biggest news to emerge for our niche, though it does demonstrate the US still has some national leaders under the strain.

The 3% digital sales tax on companies which report more than €750 million worldwide, and also €25 million in revenue in France, will still be applied, though US companies could be entitled to a deduction when the OECD releases its own rules.

Following the G20 Summit in March, the OECD kicked-off a public consultation to address the tackle challenges in an increasingly digitally-defined society. After renewing the mandate of the Task Force on the Digital Economy (TFDE), the OECD has promised a draft proposal of the rules in 2020.

Should there be a difference in the definition of taxable monies or the amount which is due to France, the internet players will be granted to opportunity to deduct from the amount paid to the French Government. France’s 3% sales tax is to be applied from January 1 2019, though the question which remains is when the OECD will actually be able to propose a tax regime which all states can get on-board with.

This is the challenge which the OECD will face. There will not only be lobbyists in place from the internet giants, but also from the nation states which have an interest in maintaining the status quo. Ireland, for example, has benefitted from undercutting other countries, and without a surge of interest from the technology industry, who knows what state its economy would be in today.

One does have to wonder what Trump to Macron over Le Big Mac this weekend.

Alongside the UK, France was the first to take a tough stance against the creative accounting strategies of the internet giants. Few in Silicon Valley would have been happy with developments, as it would have held them accountable to fair and reasonable tax payments. The vast majority have been managing to avoid paying back the societies which have fuelled such extravagant bonus cheques for years.

Silicon Valley has been promising to help the development of society for years, though apparently this only counts when the revenues are directed towards its own bank accounts. When it comes to helping to build hospitals, buy school books, care for the elderly, fund fire departments and fill in pot-holes on roads, it has little interest.

Prior to the discussions over lunch, Trump had promised to hit back against France.

“France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home Country, the USA,” Trump tweeted in July. “We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine.”

Firstly, each country around the world should be entitled to tax companies when they reap financial benefits from its citizens; this is fair and reasonable, but Silicon Valley was better than most traditional industries of hiding profits from the tax man. Secondly, this tweet gave us some insight into the retaliation from the White House.

Following the tweet, the United States Trade Representative (USTR) opened an investigation under Section 301 of the Trade Act of 1974. This is the same first-step of the strategy which kicked-off tariffs against the Chinese and the subsequent trade-war. Wine, cheese and striped t-shirts were presumably being eyed-up, and it seems this was too much for Macron.

Although the digital taxation remains in place, this is a softened stance from the French President. The White House will certainly be happy with this outcome, although not completely satisfied, as it proves it can still act as a bully in international politics, throwing its monstrous weight around.

However, it is not as satisfactory an outcome as many in Silicon Valley would have wanted; they will still have to pay tax in France.

“Unfortunately, the enactment of France’s Digital Services Tax threatens to undermine the OECD process,” Google said in a statement to the USTR during the early stages of its investigation. “It is a sharp departure from long-established tax rules and uniquely targets a subset of businesses.”

The current tax rules are dated and allow the internet players to abuse the grey areas which are present in the law, or language which does not account for digital services. Of course, these companies are not happy, they will have to pay more tax.

As mentioned above, the companies will still have to pay the French tax. If Macron has been persuaded to drop the tax completely, there would have been plenty of time to bank an extra couple of hundred million and delay the implementation of the OECD rules. It would have been additional grace period.

What remains to be seen is what impact this will have on the approach to digital tax across the rest of the bloc. France was leading the charge, and this might well dent the confidence of other nations to follow suit, especially smaller ones which might be more susceptible to threats from the White House.

The tax is still going ahead, though Trump has proved he can still flex and make the French flinch.

France next on the list to be teased with Trump’s tariffs

The United States Trade Representative (USTR) has opened an investigation into France’s digital sales tax, a move which could lead to the European nation facing trade tariffs.

The digital sales tax in France has been viewed as a means to force internet companies to play fair. The creative accounting practices of these companies has ensured nominal tax has been paid to various European states, and France has had enough. The proposed tax has passed through the lower parliamentary house, the National Assembly, and is expected to get the final thumbs-up today from the Senate.

As a result, US Trade Representative Robert Lighthizer has announced the launch of an investigation under Section 301 of the Trade Act of 1974 of the Digital Services Tax (DST) into the French government. This is the very same tool used by the Trump administration to justify the introduction of tariffs against China due to the alleged theft of IP.

“The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies,” said Lighthizer.

“The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce.”

What is worth noting is that while many US companies might find themselves paying more tax, this is not necessarily a move to raid the US economy. This tax has been directed towards all digital companies who abuse the international tax system to the detriment of the French government and society irrelevant as to their nationality, it just so happens the US dominates the internet industry.

Many will view the French move as a gallant effort to hold the internet economy accountable, though it seems the US does not feel the same way; its own economy and society does of course benefit from the tax skulduggery.

The suggestion of the US imposing tariffs on the US comes two days after President Trump declared Indian tariffs on US goods should be a thing of the past.

The tax itself has been in the pipeline for some time, as European nations have become increasingly frustrated by the taxation strategies of the digital economy. Companies such as Google, Facebook and Amazon have been shifting profits freely throughout the world to ensure lower taxation rates are paid. This move from France, to impose a 3% sales tax on revenues realised within its borders, seems like an effective counter-punch.

What is worth noting is it is not just the US firms who are abusing this taxation system. Sweden’s Spotify is another which has played the system well. In the UK, as an example, the company reported revenues of £444 million over the course of 2017 but paid £891,425 in tax as it only reported advertising revenues in the country. Revenues associated with the ‘Premium’ subscription product were moved to Sweden where it could pay less tax.

France is not alone with its frustrations either. The UK is another nation which is considering its own digital tax reforms, while the European Commission attempted to pass bloc-wide rules recently. These rules were blocked by the likes of Ireland and Luxembourg, two countries who benefit significantly from the fleecing of other nations.

Now onto the US response. Section 301 and related provisions of the Trade Act offer the USTR the opportunity to investigate what it or the White House deem as a foreign country’s unfair trade practices. There will be a public consultation and lobby efforts from Silicon Valley and should the USTR conclude France is unfairly persecuting US business, tariffs could be directed towards imported cheese and garlic.

Tariffs are a popular weapon for Trump and the White House hacketmen on the international trade scene, as it is becoming increasingly common for US diplomats to huff and puff, while banging their chest and showing off their biceps when things don’t go their way.

Unfortunately, the US doesn’t really have a leg to stand on here, though the presence of logic will not persuade the hawks from their flightpath. Internet companies, all over the world for that matter, are taking advantage of a dated taxation system which allows them to grow bank accounts without recontributing to the country which has fuelled this prosperity. There is little which can be said to counter this position.

Interestingly enough, the move could spark wider tensions. The relationship between the White House and the European Union is already stressed and targeting a single member state might not be received well by the bloc. The US feels targeting a single member state is legitimate, though there might well be a bigger conversation to be had in Brussels.

With the clouds of tariffs already lurking above the European automotive industry, the US might find itself with another trade disagreement on its hands before too long.

Austria and Australia join the march against Silicon Valley

The days of the wild-west internet seem to be coming to a close with Austria and Australia becoming the latest nations to update the rules governing the business activities of the internet giants.

At the foot of the Alps, the Austrians are proposing a new 5% sales tax on digital revenues which are realised in the country, another European state to tackle the ‘creative’ accounting practices of Silicon Valley. Down under, the Australian Government plans on introducing tougher rules which will place greater accountability on social media platforms for extreme and offensive content.

For years the world watched in amazement as the likes of Google, Facebook and Amazon climbed higher up the ladder of influence. We gazed in wonderment as Silicon Valley seemed to pluck profits out of thin-air and their CEOs hit celebrity status. But then the scandals started to roll-in and we all realised these companies had abused the privilege of self-regulation.

The Cambridge Analytica scandal was the watershed moment, a saga which dominated headlines around the world for months and hauled politicians away from free lunches and back into the debating chambers. All of a sudden everyone realised the likes of Zuckerberg, Bezos and Page were not our friends, but incredibly intelligent businessmen who were exploiting the grey areas sitting idly between the mass of criss-crossing red-tape.

What followed this scandal was a more forensic look at the business models of the internet giants. Those looking close enough found trickily worded terms and conditions, confusing processes, ransom opt-ins and abused freedoms. Users were being tracked without their knowledge, personal information was being traded as a commodity and tax havens were being exploited. Opinion on Silicon Valley turned sour.

On the other side of the coin, it wasn’t just the craft and cunning of Silicon Valley lawyers to blame, but inadequate rules for today’s digital era. Politicians and regulators woke up to the fact rules and legislation needed to be updated to create a fair and reasonable policy landscape to hold the internet giants accountable. Experts were brought in to account for the vast gulf in competence and the march towards Silicon Valley began.

A perfect storm has been brewing around the internet giants and as the weeks pass more countries are taking a more stringent approach to the business of the internet. Australia has been trundling along with incremental progress, and now Austria has entered the fray.

“Through the digital tax package, we are closing tax loopholes and thereby ensuring that large digital corporations, agency platforms and retail platforms are called to account,” said Austrian Finance Minister Hartwig Löger. “Through fair taxation of the digital economy, we are establishing equity in taxation.”

Moving forward, a digital tax of 5% will be introduced for large digital corporations, those with global sales of € 750 million, of which €25 million originates in Austria. The new rules will also take away VAT exemptions for deliveries from foreign countries. Previously, orders valued below €22 were exempt from the tax.

“Through this measure, we are taking digital agency platforms to task,” said State Secretary of Finance Hubert Fuchs. “No one is entitled to evade the obligation to pay tax.”

Austria is of course not alone in this tax assault. As the member states of the European Union cannot agree on a bloc-wide tax mechanism, plans were blocked by nations who benefit from the status quo such as Ireland, individual states have gone on alone. France and the UK have already set plans in motion, but we expect such proposals to start snowballing before too long.

Australia is targeting a different area of contention however. Following events in Christchurch, New Zealand, and the simultaneous live-streaming of the incident, the Australian Government has introduced new rules which will hold social media and other social media platforms accountable for the dissemination of offensive material.

The Sharing of Abhorrent Violent Material bill creates new offences for content service providers and hosting services who fail to act expeditiously to remove videos containing “abhorrent violent conduct”. Such conduct is defined as terrorist acts, murders, attempted murders, torture, rape or kidnap.

The technology community and legal experts have slammed the new rules, and while there are some valid points, the social media and hosting platforms might have to be forced forward. It is an incredibly difficult task to identify these videos, such is the complexity of identification in such as vast swarm of uploaded content nowadays, but without the threat of penalty there is a risk progress will not move at a desired pace.

Following the incident, Facebook pointed out that it did take down the video quickly, though it was not able to use AI to identify the content. This is where it becomes incredibly difficult for the technology industry; these applications need abhorrent content to be trained to identify abhorrent content. It’s a bit of a catch-22 situation, but harsh penalties for non-compliance will force the industry to find a solution.

“We have heard feedback that we must do more – and we agree,” said Facebook COO Sheryl Sandberg in a letter to the New Zealand Herald. “In the wake of the terror attack, we are taking three steps: strengthening the rules for using Facebook Live, taking further steps to address hate on our platforms, and supporting the New Zealand community.”

Sandberg has promised new restrictions on how live videos can be uploaded and streamed to the platform, though details were incredibly thin. Facebook will not want to introduce too many restrictions, making the process too convoluted and tiresome will impact user experience, though it clearly has to do something. The opportunity to broadcast horrific acts has become too accessible.

This is the problem which Facebook and everyone else in the digital economy is facing. The promise is to open up the gates and allow people to express themselves, but unfortunately there are people who will take advantage of this situation. It is an incredibly difficult equation to balance.

Technology will eventually help the internet companies get to a suitable position, with the potential of AI grafting through the millions of uploads, however the training period is going to be a difficult process. The risk of going too sensitive is restricting free speech, though with content uploaded from shows such as Game of Thrones, there is plenty of room for error.

The internet giants will want to resist change, despite giving the impression of encouraging more regulation and government intervention, but it won’t be able to hold back the tides forever. With privacy concerns, fake news, tax evasion, political influence, anti-trust accusations and the unknown power of data analytics, the internet giants are simply fighting on too many fronts.

These are companies who have incredible financial power and immense armies of lobbyists, but Silicon Valley is the bad guy right now. Politicians have spotted an opportunity to make PR points by unloading on the punching bag, and you can guarantee there will be many lining up to take a swing.

France and Germany give OTTs early Xmas gift in digital tax saga

Europe ambitious plans to hold the internet giants accountable to fair and reasonable taxation have been temporarily scuppered after resistance from several nations, most notably France and Germany.

While Silicon Valley is still not in the clear, the internet giants will be breathing a deep sigh of relief as their hard-working lobbyists are given another couple of months to influence the plans. France and Germany seem to be the main opponents of the aggressive tax assault, drawing up their own suggestions at the G20 Summit which would allow many of the biggest players to continue to dodge the tax man.

The initial plan was relatively simple; hold the internet players accountable to fair and reasonable conditions by implementing a 3% tax on digital revenues realised in EU member states. This would have placed all the current tax dodgers on the block. The Franco-German joint declaration was supposed to be a compromise, answering the initial opposition, but it seems this watered-down version is not going far enough.

While the Franco-German version of the digital tax certainly is much diluted compared to the initial proposals, it has still been resisted by other players who are protecting their own interests. It seems the ‘all for one and one for all’ theoretical attitude of the European Union does not translate directly into Irish or Norwegian.

“Following a thorough analysis of all technical issues, the presidency put forward a compromise text containing the elements that have the most support from member states,” a statement from The European Council reads. “However, at this stage a number of delegations cannot accept the text for political reasons as a matter of principle, while a few others are not satisfied yet with some specific points in the text. That text did not gain the necessary support and was not discussed in detail.”

Unfortunately for the European Union, this is the issue with any material changes made to rules and regulations. A collection of 27 member states certainly creates influence on the global and political stage, though it only takes one detractor to spoil any plans.

Looking at the suggested middle ground, a Franco-German joint declaration made a point which will please some more than others. The objection here is down to the wording of the proposal with France and Germany believing advertising revenues should be targeted, pushing Facebook and Google into the line of fire, as opposed to digital revenues as a generic term.

In France and Germany, some of the world’s largest internet-based businesses would gain a reprieve. Should the new rules target digital advertising revenues specifically, while subscription services, hardware and online marketplaces would escape. The likes of Amazon, Apple and Spotify would be free to continue practising their suspect taxation strategies.

The pattern of affairs here is something which should be pleasing for the internet giants, or at least most of them. What started as an assault on the internet players is starting to look like a very different battle nowadays, leaning much more towards Google and Facebook specifically.

These two might feel a bit victimised, but the ways things are heading it looks like a deal which is accepted by every member state would not be the victory the Brussels bureaucrats originally envisioned. With bureaucrats under pressure to produce a plan, accepted by all member states by March 2019, a lighter touch approach will be needed. We suspect such a plan will be put together, championed as a revolutionary position, though the internet players will be given enough wiggle room to ensure there is no meaningful victory.

What will help internet players sleep at night is the knowledge they only need to get one member state on side to veto the battle plan. Rev up the lobby machine!

EU divided on digital tax

Fears over a reaction from the US has sent Finance Ministers from Ireland, Sweden and Denmark cowering back to their spreadsheets as the EU digital tax hits an early stumbling block.

While the collective bargaining power and protection afforded by the European Union is certainly useful, the cumbersome nature of the bureaucratic beast and unanimous decision making ensures it is anything but. As with many proposed rule changes in the past, objections from a handful of member states have slammed the emergency brakes on the digital tax, aimed at holding the internet giants accountable.

According to the Guardian, the Finance Ministers of Ireland, Sweden and Denmark have all aired their criticism not on the concept of the tax, but fears over what President Trump might suggest as a retaliation. There’s a pragmatic approach to business and there’s spineless appeasement to a bully, we’ll let you decide which one this is.

Of course, it would be unfair to herd all of the EU member states into the same cowardly-corner as Ireland, Sweden and Denmark. 12 member states are already moving ahead with their own plans to create a localised digital tax, including the UK as was announced during the Autumn Budget, and some are acting somewhat hawkish about it. The French Government has suggested it would like the tax rates on the playing field by the end of 2018, though Germany seems to be favouring a more watered-down version of the rules.

The EU wide tax on those taking advantage of creative tax regimes, would be the best solution however. A united front against the slippery Silicon Valley internet giants, as well as those from other nations around the world, would of course be the best way to claim that 3% of local revenues, but it is becoming more difficult to imagine that a reality.

The fainthearted trio do of course have something to worry about. Despite Trump slapping tariffs on Chinese goods, and threatening to revamp tax laws so Amazon cannot take advantage of the US tax havens, he would most likely take the US tax as an attack on American values and a threat to the borders. The President is a man or rarely recognises consistency and before too long will probably be describing Jeff Bezos as a close family friend who have been relentlessly pursued by the penny-pinching Europeans.

Ireland also has a lot to lose. After proving it was incapable of managing its finances in a responsible way, the technology giants could be seen as somewhat of a saviour to the economy. Apple, Facebook and Google are just a few names who house a considerable base in the country. Ireland certainly has its own interests to protect.

It’s disappointing to see such weak behaviour in the face of an orange-hued, bullying politician, but at least there are some nations who are prepared to go it alone and hold the internet giants accountable to fair taxation.