A Taxing Problem

While the coronavirus cuts a swathe through the world’s economies and decimates share prices, another less lethal but in the long run more consequential threat is building. Unless representatives of the world’s leading economies can reach agreement by the end of this year, which is highly unlikely, the upset to the world economic system caused by President Trump’s decision to impose costs on China for its predatory trade practices will seem like a walk in the park.

The ability of the world’s major international companies to avoid – not evade, which is illegal – paying taxes has become the stuff of which legends are made in the circles in which the world’s accountants travel. It is close to professional malfeasance for one of their number to have a client hand over substantial sums to the tax collectors in the countries in which they do business, or anywhere else for that matter. According to computations by the European Commission, in 2018 the average tax rate paid by global companies came to 9.5% of profits compared to 23.5% for traditional firms.

This economist has not been alone in urging governments to end their feckless search for taxable profits and instead tax revenues in the countries in which those revenues were amassed. That avoids most of the complexities that are the camouflage that conceals avoidance. By a variety of ploys, a well-managed international company can move its profits around the world at a pace that leaves it looking at the taxman in its rear-view mirror.

Unfortunately, knowing what to do – tax gross revenues or receipts rather than profits – seems easier than doing it, especially when dealing with providers of digital services that silently and unseen cross national borders, rather than with tangible goods such as steel, autos, agricultural products and the like. For one thing, most successful providers of digital services are American companies – Amazon, Google, Facebook — and the thought of foreign governments taxing these extraordinarily profitable entities that are making America great does not sit well with the American president’s notion of fairness.

As things now stand, Austria, Hungary, Italy, Turkey and France have enacted digital services taxes (DST) according to the Tax Foundation, although not all have begun collecting the indicated proceeds. Belgium, the Czech Republic, Slovakia, Spain, and the UK have published proposals to adopt such a tax, Latvia, Norway and Slovenia have announced or shown intentions to implement such a tax.

Two problems. The first is that a regime in which the DST varies from nation-to-nation, as those enacted do, places a huge administrative burden on the companies, and provides them with an incentive to concentrate their promotional efforts and investments in the lower-tax venues.

“Achieving a consensus has become critical” say analysts at KPMG.

The second is that French president Emmanuel Macron has elected himself the most vigorous defender of the DST, and a broadly based variant at that. Macron has spent a good part of his time in office offending his American counterpart, with a handshake so gripping that it challenged Trump’s macho self-image, a public insult at ceremonies commemorating the 75th anniversary of the D-Day invasion, and by stalling EU trade negotiations with the US by insisting on protecting his farmers from American competition.

So far the score in this intensely personal battle is Trump 100, Macron nil. When Trump threatened to slap 100% tariffs on $2.4 billion worth of imports of cheese, wine, handbags and other luxury goods if Macron imposed his 3% DST on American companies, the French president meekly announced he would defer its application and abandon it entirely once an international agreement had been reached.

Britain’s Prime Minister has shown no inclination to mimic France’s retreat by delaying the planned April introduction of a 2% levy on social media platforms, search engines and online market places that “derive value from UK users”. Add that to Boris Johnson’s decision to turn down Trump’s personally delivered request that Britain stop buying equipment from Huawei, and the mooted US-UK trade deal is no longer the sure thing that it was once thought to be.

Enter the Organization for Economic Co-operation and Development. It is attempting to broker a deal that would set international guidelines for the taxation of online activity, and for a global minimum tax. The OECD reckons that the proposed taxes would enrich the world’s treasuries to the tune of $1bn annually. But the world’s taxmen should not count their shares of the bonanza before the deal is hatched.

Negotiations are proceeding just when the impending US elections dominate Trump’s thoughts. And those of many senators. If Trump is willing to concede anything, the senate, which would have to ratify the treaty, certainly is not. And if both were to become somewhere between reasonable and generous, Macron could not reciprocate by diluting the protection his farmers receive without watching France’s rural areas go up in the flames that are consuming Paris on a regular basis. If both Trump and Macron give ground, there are dozens of other nations that would not go along, among them low-taxing Ireland, which refuses to accept the appellation “tax haven”, but benefits as if it were such.

The OECD tax proposal “is hanging by a thread and the consequences are under-appreciated by European governments” opined Itai Grinberg, a professor at Georgetown University law school. Those are the very same governments that must know that US Trade Representative Robert Lighthizer has already launched an investigation to determine whether the DST is discriminatory, using Section 301 of the 1974 Trade Act. The very section of which Trump relied to impose tariffs on China. As treasury secretary Mnuchin warned Britain and other countries, ” If people want to just arbitrarily put taxes on digital companies, , we will consider arbitrarily putting taxes on car companies…”. Levy this tax and you will find yourself “faced with President Trump’s tariffs”. That’s no empty threat.