As the COVID-19 pandemic continues to cripple economic growth across the globe, the United States Trade Representative (USTR) and policymakers need to be prepared for trading partners seeking to recoup lost revenues through new international taxation measures. Specifically, more nations are considering implementing or have implemented digital services tax (DST) frameworks that would largely discriminatorily target U.S. tech companies to help cover budgetary shortfalls.
As Internet use and increasing digitalization continue to shape modern life, digital trade has emerged as a crucial component of many world economies. In the United States alone, the Internet had an economic impact of $4.2 trillion in 2016. But many international trade deals are silent on digital trade and the taxation of digital services, having been agreed to before the Internet had such a prominent impact on modern life. While it may be true that international taxation frameworks should be updated to reflect the newfound role of the Internet, any agreed upon framework should comport with existing international taxation norms and should not discriminatorily target American companies.
While the dozens of proposed DSTs are largely directed at the biggest firms, many governments drafting these taxation regimes specifically exclude domestic firms from the DSTs. Instead, these taxes discriminate against U.S. firms and purport to have little to no impact on smaller companies, including startups. But these taxes are not uniform in their application—many tax at differing rates and apply to different revenue thresholds—leaving many companies to undertake costly tax planning efforts to determine if they must comply. Moreover, particularly with the pandemic continuing to wreak havoc on world economies, what is to stop the revenue thresholds from applying to smaller and smaller companies (when some, like the DST in India, already applies to companies with just over $280,000 in revenue)?
Perhaps more importantly, the burden of taxes imposed on large American firms will instead be passed on to smaller companies and users by way of increased costs for services provided. Engine has submitted comments to Congress and to USTR on the expected effects of DSTs on startups as more of these laws go into effect. Unfortunately, our words have not merely served as warnings. Over the past several weeks, tech companies including Apple, Amazon, and Google, have announced plans to increase prices on services in the UK as a result of their enacted DST. These taxes do not exist in a vacuum. As more and more DSTs go into effect, large companies will see no other choice but to pass the cost on. That means free or low cost services on which startups rely, like cloud computing services, will be more expensive. For startups with bootstrap budgets, even nominal increases in expenses could be enough to force them to close their doors.
As the U.S. continues to engage with its trading partners across the globe, it is imperative that USTR and policymakers continue to fight against these discriminatory taxes, to help ease the already heavy burden on the startup ecosystem. And as the pandemic continues to impact countries large and small, American companies need to be prepared for more DSTs to be enacted across the globe.
