The Big Story: Digital Services Taxes passed on to end users, including startups
Efforts to implement a global tax deal that would help avoid sector-specific taxes on digital services ran into additional roadblocks this week. The development follows new government reports confirming that the digital services taxes (DSTs)—which are often imposed upon large technology companies—are actually paid by their end users. As a result, startups, who often build their companies with services from other large tech firms, can face increased costs to building and growing their businesses.
Last year, 136 countries agreed to a global tax framework negotiated through the Organisation for Economic Co-operation and Development, that would create a global minimum tax and eliminate DSTs. While many countries’ DSTs are on hold or will be eliminated pending the implementation of the global tax deal, unless acquiescing countries ratify and adopt the deal, the discriminatory taxes will return and be put into effect. Many countries have faced headwinds to the implementation of the global tax deal. The European Union (EU) further delayed conversations this week due to continued opposition from the Hungarian government. And in the U.S., congressional Republicans remain opposed to the deal.
The implementation struggles come amid more evidence that the costs of DSTs are actually borne by end users, and not the large, mostly U.S. firms they are levied against. A recent report from the British government revealed that the country’s digital services tax reaped almost 360 million pounds from large U.S. tech companies during its first year of implementation—the costs of which were borne by the firms’ customers, including startups. According to the report, the UK digital services tax—introduced in April 2020, and which imposes a two percent charge on online revenue—“hauled in 30 percent more than the government had forecast in 2021” from the gross revenue from social media services, online marketplaces, and other digital services from American tech giants. Companies affected by the tax indicated that they passed the cost of the levy onto sellers and third-party businesses that use their services.
As Engine has repeatedly argued, DSTs can be dangerous for U.S. startups who often have tight budgets and limited resources and rely on the free or low-cost services provided by companies that DSTs target. Implementing new taxes on these companies are likely to continue to result in higher prices for those same services, and startups may be unable to shoulder the added cost. Without a tax deal that eliminates a patchwork of discriminatory DSTs, U.S. startups will face uncertainty and inconsistency when seeking to expand globally.
Policy Roundup:
Amid lame duck push, reminder that SHOP SAFE would threaten startups, small businesses. The SHOP SAFE Act would have an outsized, negative impact on e-commerce startups and other entrepreneurs and small businesses that sell online, Christian Braun, the CEO of hobbyDB—a Colorado-based online collectibles platform—explained in a new op-ed this week. As we’ve mentioned before, SHOP SAFE is a bill that would place high compliance burdens on e-commerce startups in an attempt to deter unsafe counterfeits, but it is so broad that it would require all types of e-commerce related startups to undertake (likely impossible, unaffordable) steps to try and detect potential trademark infringement, stunting innovation and competition. As Congress continues to move legislation in the lame duck session, Braun urged policymakers to ensure they craft sound policy that helps, not hurts, startups.
Broad coalition urges Congress to reject tech, media antitrust carveout. Congress rejected an attempt this week to attach an online journalism bill to the unrelated National Defense Authorization Act (NDAA). The bill, the Journalism Competition and Preservation Act (JCPA), aims to address challenges facing local media organizations, but it would create a system to force certain large tech companies to link to certain news content and pay for those links—restricting the ability of those platforms to remove problematic content and limiting free speech and the exchange of facts and information online. Engine joined 26 other advocacy organizations, tech companies, non-profits, and trade associations in a letter urging Congress not to advance JCPA through any must-pass legislation like NDAA, and it was ultimately removed, creating some uncertainty about what comes next for the proposal.
The 411 on the Small Business Investment Company (SBIC) Program. The Small Business Investment Company (SBIC) program is a critical program designed to improve small business access to venture capital, matching private capital with government-backed investment. The Small Business Administration (SBA) is currently soliciting feedback on a proposed rule to improve access to the SBIC program so that it better serves underserved communities. We explore in a new blog post how small businesses and startups benefit from this program, why the program is crucial to a thriving innovation ecosystem, and the policy conversations that may guide its future.
Congress negotiates tax provisions through lame duck. Republicans and Democrats remain divided over a year-end spending deal that could determine the future of a number of tax credits, including the Child Tax Credit (CTC) and the R&D tax credit, which is important for startups. Some Democrats are arguing that tax credits for businesses shouldn’t be extended if lawmakers can’t come to an agreement on the CTC, even though there is Democrat support for the R&D credit. Complicating matters, Congress has under two weeks left to fund the government, but it is unclear whether lawmakers will pursue a full funding bill where the credits could be included or instead pass another short-term continuing resolution where they would likely be left out.
Acquisitions on the mind of policymakers this week. Acquisitions in the technology sector are top of mind for regulators this week amid ongoing litigation, newly announced merger challenges, and interviews discussing competition policy. Concurrently as this Congress winds down, antitrust advocates are looking to push their proposals across the finish line. As lawmakers and regulators consider policies impacting acquisitions, we hope they’ll take into consideration their impact on startups and the perspective of startups that have had their companies acquired.
