As Global Fight Over Digital Services Taxes Heats Up, U.S. Startups Stand to Lose
TLDR: As federal officials seek public input regarding the response to countries that have enacted digital services taxes (DSTs) on U.S. Internet companies, the startup community remains concerned that they will be affected by the levies in the form of increased costs for the services and products they rely upon. While the Biden administration and global officials work to reach a uniform digital tax framework, it’s critical that countries—and even U.S. states—refrain from imposing their own digital services taxes that could harm startup formation and success.
What’s Happening This Week: The U.S. technology community is continuing to closely monitor global efforts to tax mostly large Internet companies following an announcement from the Office of the United States Trade Representative (USTR) last week that the agency is seeking public comments on proposed trade actions against six countries—Austria, India, Italy, Spain, Turkey, and the United Kingdom—that have adopted their own digital services taxes. USTR has been investigating several countries’ efforts to impose digital levies under Section 301 of the Trade Act of 1974, which empowers the agency to resolve trade disputes and take retaliatory measures. USTR said in a series of Federal Register notices this week that the DSTs imposed by the six countries it is investigating could cost U.S. tech companies as much as $880 million.
The DSTs adopted by the six countries—similar to those implemented or considered by others—would impose levies on mostly U.S.-based Internet companies where their services are used, instead of where the companies are physically located. France retroactively began enforcement of its own DST at the end of last year that imposes a three percent tax on Internet companies with a revenue of 750 million euros globally and 25 million euros in France. The U.K., which could face 25 percent tariffs on British exports to the U.S. if USTR moves forward with its proposed actions, already adopted a two percent levy on the U.K.-based revenues of large Internet companies that offer search engines, online marketplaces, or social media services. Most countries, however, have refrained from implementing their own DSTs in order to give the Organisation for Economic Co-operation and Development (OECD) time to reach an international digital tax agreement. As a result of the pandemic, the OECD has delayed the target deadline for a DST agreement until mid-2021.
While the Biden administration has agreed to work with OECD on a global digital tax framework, the lack of progress on an agreement has allowed other countries to implement and propose their own patchwork of DSTs as the world continues to deal with the coronavirus outbreak. U.S. Trade Representative Katherine Tai said last week that the U.S. “remains committed to reaching an international consensus through the OECD process on international tax issues,” but the agency is still moving forward with steps to explore potential tariffs on countries that are adopting their own DSTs.
Why it Matters to Startups: Although most of the proposed and implemented DSTs target large multinational Internet companies, the U.S. startup community is likely to be impacted by higher costs for services and products as a result of the levies.
Many of the affected technology companies offer digital services that early-stage companies depend upon to grow their operations, including cloud-based products and advertising services. The implementation of digital taxes on a country-by-country basis means that large companies are likely to pass on the financial burden of DST-related costs to startups and other nascent companies. And other countries have adopted DSTs that apply to non-domestic companies with lower revenue thresholds, which could affect a wider range of U.S. startups. India’s equalization levy, for example, applies to all “nonresident foreign companies” that receive approximately $265,000 in revenue from Indian customers. As the pandemic continues, countries could similarly adopt DSTs with lower revenue thresholds in order to account for the ongoing economic uncertainty.
For startups on bootstrap budgets, even small increases in operating costs—especially during the pandemic—could force nascent ventures out of business. And large Internet companies targeted by DSTs are already increasing the cost of their products and services in certain countries. Several tech companies have already announced plans to increase the costs of their services in the U.K. and in Spain and France as a result of the countries’ digital levies.
In order to reach a digital tax compromise that does not unfairly target U.S. firms or harm global competition, international officials should use the ongoing OECD negotiations as an opportunity to craft a uniform digital tax framework. Imposing separate country-by-country levies causes regulatory confusion and uncertainty, creates a host of tax planning issues, and increases the potential for countries to implement retaliatory tax and trade measures. Despite the pandemic-induced delay in the OECD negotiations, officials should continue to focus on adopting a framework that provides Internet companies with certainty and does not result in ad hoc increases in the costs of digital services that would disproportionately impact startups.
Like the country-by-country adoption of these taxes, a state-by-state rollout of possibly unconstitutional digital taxes also threatens to increase the costs of digital services and products that startups depend upon to grow. Last year, Maryland lawmakers passed a measure that would tax Internet companies that profit from digital advertisements in the state up to 10 percent of their annual gross revenues.
Digital taxes affecting multinational Internet companies should not vary from country to country, or from state to state. Imposing separate DSTs, rather than pursuing one uniform framework, only makes it more difficult for early-stage companies to access the critical services and products they need to succeed.
On the Horizon.
Axios is holding a virtual discussion tomorrow at 12:30 p.m. to examine the future of tech mergers and acquisitions.
The Information Technology & Innovation Foundation is holding a webinar this Thursday at noon to discuss ways of bridging the rural broadband gap.
The Information Technology Industry Council is holding a virtual roundtable this Thursday at 3 p.m. to discuss the tech industry’s role in addressing gender inequalities.
