Digital Services Taxes Will Harm Startups Across the World
TLDR: As intergovernmental organizations and countries continue to discuss implementing their own digital services tax (DST) frameworks on multinational Internet companies, France has notified large online platforms that they must begin paying the country’s levy this month while Canada recently announced plans to impose its own DST. Although most DSTs under consideration—as well as those that have already been implemented—target large, mostly U.S.-based tech companies, the startup community remains concerned that the burden of the taxes will be passed on to smaller companies and users in the form of increased costs for products and services.
What’s Happening This Week: The U.S. tech sector is closely monitoring global efforts to tax large digital companies where their services are used, rather than where the company itself is physically located. The renewed scrutiny comes as international organizations, like the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN), continue to press forward with their own digital tax frameworks, even as certain countries begin imposing their own levies.
This month, France began enforcing its own DST, a retroactive three percent levy on certain Internet companies with a revenue of 750 million euros globally and 25 million euros in France. The country has already begun sending notices to large American tech companies like Google, Amazon, and Facebook. Although France introduced the tax last year, policymakers agreed to hold off on implementing the measure after the United States threatened to impose retaliatory tariffs of as much as 100 percent on approximately $2.4 billion worth of French goods. The truce between the two countries was set to remain in effect until December in order to give the OECD time to negotiate a global tech tax with almost 140 countries before the end of the year. As a result of the ongoing coronavirus pandemic and political disagreements, however, the OECD has delayed the deadline for a DST agreement until mid-2021, and the Trump administration is now considering imposing tariffs on France as soon as Jan. 6.
Although several countries, such as the United Kingdom, have already implemented their own DSTs, most countries that have proposed similar taxes have held off implementing them in order to give the OECD time to reach a global deal. The delayed OECD negotiations, however, have prompted other countries to consider moving forward with their own DSTs. Canada’s Finance Department said last week that the country plans to implement its own digital levy—beginning in 2022—that will remain in place until an international agreement is reached. And the European Union has also discussed implementing a bloc-wide DST if a global deal is not reached by mid-2021.
Despite the ongoing—albeit delayed—global talks, the UN voted to add language regarding DSTs to its model tax treaty in order to allow countries to decide how much tax to impose on the gross turnover of digital companies. The measure, pushed by developing countries, comes as cash-strapped governments affected by the coronavirus pandemic look to bring in revenue while the OECD talks remain stalled.
Why it Matters to Startups: Although most digital services taxes are targeted at large Internet companies, startups are likely to see higher costs for the services that they depend upon as a result of the levies. While international taxation frameworks should be revisited by international officials, particularly in light of the pandemic, policymakers should ensure that these levies conform with global taxation norms and do not unfairly discriminate against U.S. companies.
As we have noted, many of the Internet companies affected by DSTs are large U.S. firms that provide critical services, such as online advertising tools and cloud-based products. Startups and other emerging businesses rely on these tools and resources to grow and expand their operations, and large Internet companies are likely to pass on the additional DST-related costs to these firms. Earlier this year, several tech companies—including Apple, Amazon, and Google—announced that they would be increasing the cost of services in the UK as a result of the country’s DST. For startups with slim operating costs and bootstrap budgets, even small increases in expenses—especially during the pandemic—could force them out of business.
The OECD discussions provide the opportunity for global officials to negotiate a uniform digital tax framework that makes sense for today’s Internet-enabled world and does not unfairly target U.S. firms or harm global competition. A country-by-country implementation of DSTs, however, is likely to lead to widespread uncertainty, regulatory confusion, and the potential for retaliatory tax and trade measures. With some countries already exempting domestic companies from DSTs, it’s clear that international action is needed to create a digital tax framework.
Policymakers cannot effectively modernize and review international taxation schemes if they view this as an opportunity to fill their depleted coffers by willfully targeting U.S. tech companies. Many of the DSTs already implemented or still under consideration by individual countries are not uniform in their application and often impose taxes at different rates and revenue thresholds. This patchwork approach forces Internet companies to undertake costly tax planning, does not set a standard revenue threshold, and could result in double taxation. So while France’s newly enforced three percent digital tax affects Internet companies with a revenue of approximately $29.8 million in France, India’s digital services levy applies to all “nonresident e-commerce companies” with just under $270,000 in revenue from Indian customers. As the pandemic continues, there is also a growing fear that other countries may implement DSTs with lower revenue thresholds in order to account for the extended economic uncertainty.
As global policymakers continue to negotiate with the OECD on a digital tax framework, it is essential that they push for an agreement that does not unfairly discriminate against U.S.-based companies. And Congress, federal agencies, and the White House need to continue pushing back against harmful digital taxes that will ultimately stifle startup growth and innovation by making it harder for emerging companies to access the critical products and services they need to thrive.
On the Horizon.
As Congress debates year-end spending legislation before current funding levels expire at the end of the week, the CASE Act—legislation that would change copyright enforcement and open up startups and their users to new risks—has resurfaced for potential inclusion. Engine has raised concerns about the CASE Act over the past two years, and this week a group of Internet companies sent a letter to policymakers expressing concern about the legislation’s harmful impact on Internet users and smaller, Internet-enabled creators.
The Senate Commerce Committee is holding a hearing at 10 a.m. tomorrow to discuss the future of transatlantic data flows following the rollback of the EU-U.S. Privacy Shield framework.
The Senate Judiciary Committee is planning to hold a markup of the Online Content Policy Modernization Act (OCPMA) at 10 a.m. on Thursday. As we previously noted, this legislation would make it easier to sue startups out of existence and would open doors to abusive copyright claims against everyday Internet users.
