Digitalization of everything is the motto of 2021. With the global pandemic, there has been a significant acceleration in the growth of the online world.
Companies like Facebook, Amazon, Microsoft, and Apple are based in one country but serve and profit from many other countries where they have little to no physical presence. As a result, governments across the globe have questioned how to tax these virtual, multinational, tech corporations for revenues earned in territories where they may not be physically present but are commercially active.
Countries have long tried to reach a global consensus on taxing tech corporations that are untethered by borders, most notably through the Organization for Economic Cooperation and Development (OECD). After long delays, an agreement looks increasingly likely now that there is a new administration in the White House that is more supportive of the OECD discussions.
All eyes are on the Biden Administration as more and more countries join the digital tax bandwagon, and the OECD struggles to find consensus for digital service taxes (DST). As an important trade partner for the world, and the country with the most companies impacted by the DST wave, the US’ actions now will have large consequences or positive effects, depending on the nature of its actions.
But why do they have to pay any taxes? Simply because any content produced by users for social media companies, search engines, and online marketplaces becomes marketable data for these big tech companies. That’s how they earn. But the countries in which those users live receive little or no taxable income from the companies who benefit from such operations.
Therefore, the technological overriding of national borders — the commercial erasure of geography — has compelled governments to pursue unilateral actions addressing the tax challenges of digitization. This becomes problematic for companies that can face double taxation and where taxation can be weaponized.
Consequently, the OECD along with G20, which is an important multilateral forum for global economic cooperation, have led efforts bringing together 134 countries and jurisdictions, to reach a consensus about a framework on international digital tax rules to prevent BEPS or Base Erosion and Profit Shifting which refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
Without an OECD agreement and countries going ahead with their own versions of the taxes, the entire situation could result in a worldwide retaliatory tax and tariff war between the US and other nations.
The global and local dispute about digital tax will certainly reshape the revenue-generating schemes between multinational corporations and governments involving digital services going forward.
However, there are four important dimensions of this regulatory process: transgeographical standardization, opportunities for growth at scale, appreciating business diversity, and content monopoly and digital freedom.
Transgeographical standardization is the conventional notion of taxing transactions based on a single location is on its way out — the transaction’s lifecycle and the various locations they involve will be considered. A failed multilateral digital tax and the rapid growth of unilateral digital taxes would lead to a big deal of conflicts.
The global digital tax system must be made to incentivize investment and growth, where opportunities for growth at scale comes in. Reforms must be responsive to developing countries as well, keeping in mind resource-constrained administrations.
As data collection and analytics practices continue to abound, the question of how to define digital business persists. How is the value placed on data? How are profits shared and owned in countries where users are located? How does size matter? Appreciating business diversity will provide the answers to those questions.
As successful digital taxation proves the need to rein in Big Tech power, developing the bargaining power of media companies against content monopolies becomes important to ensure normative goals for content quality and freedom in an increasingly digital-first global society.
In conclusion, the new development of international standards is likely to be a long and complex process, but the benefits of a well-thought-out, nuanced and consistent approach would be significant.
Ongoing tax talks in Vietnam
How and where to tax big tech companies remains to be an issue that is attracting increasing global attention, including Vietnam’s.
The digital economy surge and COVID-19 led several other countries to jump on the digital tax bandwagon and enact their own DST to tax digital multinationals. India being the front runner for the digital tax measures, was the first country to introduce it in 2016.
Vietnam, on the other hand, is presently in discussion. The country just introduced its interest in taxing the digital economy this year and it intends to cover the digital and e-commerce operations.
The Vietnamese government is proposing a pair of regulations that would compel global tech players such as Google, Facebook, Netflix, and Alibaba to hand over more taxes including its data.
The first policy would introduce a tax collection regime deemed “onerous” and “concerning” by a trade group funded by the likes of Apple and Rakuten. While the second would give state inspectors access to an e-commerce site’s external data on merchants.
For years long, Vietnam has been trying to regulate big tech companies — especially those based overseas — these two latest proposals specify the tools it would use.
When it comes to taxes, the Vietnamese government plans to go where the money is: banks.
The circular, which is still a pending regulation, would require banks in the country to assess and go through clients’ accounts and withhold taxes on any payments made to foreign institutions for e-commerce and digital services.
Basically, as an example, when a Vietnamese consumer buys a Netflix subscription his bank would automatically deduct a portion for tax and pass on the rest to the US streaming company.
Businesses not based in Vietnam will be able to register with the government through a web portal that is expected to be available online towards the end of this year to avoid having payments docked in this manner. In addition, they have to file taxes themselves.
Affected parties have expressed concern about the proposed measure.
Netflix told Nikkei Asia that talks with Vietnamese officials over the issue are "ongoing."
"It's for governments to decide the rules on tax — and in every country in which we operate, Netflix respects those rules and complies with applicable laws," a Netflix spokesperson said. "We have met with and continue to have ongoing conversations with the Vietnamese tax authority on these matters."
Jeff Paine, managing director of the Asia Internet Coalition, whose members include Airbnb, Yahoo, and Line, the Japanese chat app operator said, “Certain provisions in the draft circular are concerning and overly complex, which will likely result in onerous and unnecessary burdens throughout the value chain, including on Vietnamese customers.”
The other legal proposal has raised questions of enforcement and privacy since it focuses on e-commerce platforms being forced to create a search function giving the government access to their records on third-party merchants. The objective is that authorities could search these records when investigating alleged sales of counterfeit goods and other infractions by online merchants.
It is hard to see how e-commerce players can be forced to develop a search tool for the government, analysts say.
In the same report, Baker McKenzie partner Tran Manh Hung told Nikkei Asia, "I share the concerns regarding the feasibility and sensibility of this requirement, especially when this rule applies to the cross-border platform.”
Amazon, Alibaba's Lazada, and Shopee, which is owned by Singapore's Sea group, declined to comment.
The two measures proposed may cause businesses to be cautious, Long Pham, manager at Access Ventures, which invests in tech companies expressed his support saying “Online shops have a huge counterfeiting problem so it is fair for Vietnam to introduce solutions like the search tool to combat the problem.”
Adding it is also fair to tax companies that profit from the country’s market of nearly 100 million people but book their profits in lower-tax jurisdictions and both proposals would subject foreign companies to the same scrutiny already facing domestic rivals.
"These new reinforcements of anti-counterfeiting [rules] would actually help local brands, just as the new tax laws are helping local companies to win over local consumer markets by leveling the playing field," he told Nikkei Asia.
Google and Facebook, among the most frequent targets of Vietnam's tax wrangling, both declined to give any comments.
As a final point, a comprehensive, principled, multilateral solution is better than a unilateral one. A collaborative approach together with business is highly recommended in order to fully grasp the challenges, implications, opportunities, and solutions that the digital economy presents.