Asia’s digital economy needs consensus on tax
Over 135 countries, led by the Organisation for Economic Co-operation and Development (OECD), are working hard to build a multilateral consensus around international tax issues arising from the growth of the digital economy. This consensus is sought through the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS).
The evolving debate around international taxation seeks to address two primary concerns. The first is profit shifting, which relates to differences in countries’ tax laws existing in the present system. The second concern is that the present system may require a more comprehensive overhaul to suit today’s globalised and digitalised economy.
The framework applies to all consumer facing businesses. Many people assume it is aimed at technology companies. On the contrary, it is a broad framework that recognises that digitalisation has transformed businesses and economies around the world. A large part of the current tax system was designed after World War I and includes approximately 3,000 bilateral treaties. Simplifying this complex framework is crucial. In addition, a modern global tax framework needs to reflect the interconnected and complex trade patterns that drive our globalised world. The original framework was built around single source products, and doesn’t reflect the international nature in the way goods and services are created and sold today.
Taxes must evolve with commerce
The OECD has recognised the need for progress and has indicated that a partial framework could be presented in October 2020 for discussion. However, there remain a few headwinds for getting this deal done. A global system that is fair and simple needs consensus. The lack of consensus and potential delays means that government revenues are impacted, and businesses are faced with increased uncertainty.
The adverse economic impact of Covid-19 has led to an acceleration in unilateral digital taxation measures by governments, creating double-taxation and administrative hurdles for companies, and leading the United States to threaten sanctions. This regressive unilateral thinking and protestations from countries large and small are threatening to undo the OECD’s global efforts and could do more harm than good.
Against this backdrop, the world is facing a digital tax deadlock today that could adversely impact economic growth, innovation and jobs unless government leaders return to the negotiating table to find a simple and equitable solution. The lack of coordination means that companies are holding back on plans to establish operations in new markets which has resulted in less jobs.
Pivot towards a digital economy
The digital economy has played a transformative role in the world’s response to the challenges faced during Covid-19. Emerging technologies have been developed and deployed at an extraordinary pace. Artificial intelligence (AI) and big data analytics have enabled innovative, rapid and wide-ranging responses to public health and essential service delivery.
In addition, Covid-19 has accelerated existing trends. With the traditional shop front temporarily shut, access to customers for most businesses has been aided by the digital economy. E-commerce, online education and tele-health services are examples of critical areas that have taken advantage of technology to adapt and thrive during these difficult times. As technology has formed the bedrock of several industries’ Covid-19 responses, more needs to be done to expand access to the digital economy, and not widen the digital divide. A lack of consensus on a global tax framework could widen the gap even further by restricting investments, cross border trade and access to innovations for many communities.
Certainty during uncertain times
The business community wants the certainty that an agreed global framework would bring. Fiscal consensus enables better long-term planning and a level playing field for firms operating across multiple markets. The cost and complexity of individual countries creating and applying their own rules ultimately hits the pockets of the consumer and could potentially dampen ambitions of companies to invest in future growth. This is not just an issue for established global companies. If you are a growing start-up operating across Asia, the cost and complexity of adhering to multiple and inconsistent rules might mean that you think twice about offering services to overseas customers.
The Asia Internet Coalition (AIC) believes that all companies have a responsibility to pay taxes in compliance with the law of countries in which they operate, and members make significant economic contributions in the countries and communities where they do business. However, we believe corporate tax policies should not discriminate against companies and certain sectors and should be applied consistently in accordance with internationally agreed tax systems.
At its core, the new rules being considered by the OECD are to decide how profits are divided among countries in an era of global commerce, and where the line between goods and services is increasingly blurred in an increasingly global modern economy. We believe this is for governments to decide. However, it is in everyone’s interests for new tax rules to provide long-term stability and certainty for businesses to continue to innovate and invest for the future.
Agreement built around the key principles of neutrality, efficiency, certainty, and simplicity will give governments comfort on revenues, businesses the ability to grow and invest for the future, and consumers an understanding of the impact on their wallets.
Harnessing the potential of the digital economy is essential in driving global growth. Working together to create an enabling and harmonised regulatory environment would go a long way towards achieving this. Going it alone does not lead to a more integrated digital economy for any country, it will likely lead to the opposite.