In this policy brief, we take a closer look at why some European countries have imposed DSTs but not others. The argument from countries that have introduced these taxes are that firms supplying digital services are not paying enough in tax. That may be true, but there is surely a richer explanation behind the fact that Austria, France, Italy, Spain, and the UK have introduced DSTs – but not other countries in Europe.

Other countries may be waiting for the result of the OECD talks about broader changes to corporate income taxation – and perhaps they are prepared to introduce their variant of a DST in the future. Still, what might be the reason these countries did not join forces with other European countries that went for the DST? Indeed, why did many of non-DST countries take a sceptical view of the EU proposal to have a Europe-wide agreement on taxing digital services? Are there explanations that are anchored in the relative competitiveness of countries?

To read the full policy brief from the European Centre for International Political Economy (ECIPE), please click here.

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Globalisation and digitalisation allow customers to use foreign digital services or purchase directly from foreign producers more easily, but current international tax rules mean that these producers can often escape paying corporate tax in countries where they make sales. As a result of their frustration about this situation, many countries, including large EU member-states such as France and Italy, have introduced digital services taxes (DSTs), setting them at odds with the US.

Under international tax treaties, a customer’s or user’s home country (referred to as the ‘market jurisdiction’) can generally only tax a foreign producer’s profits if the producer has a permanent establishment in that country, such as a fixed place of business. DSTs depart from this norm. But DSTs suffer from design flaws. They are typically a tax based on revenues, rather than profits, which can harm firms which are not yet profitable. DSTs generally apply only to digital services (DSTs define this differently), disadvantaging the digital economy over the offline economy. Finally, DSTs often include certain revenue thresholds that effectively single out large tech giants based in the US, rather than taxing domestic businesses. This causes friction with the US – the Office of the US Trade Representative has concluded that various countries’ DSTs discriminate against US firms, which may be a precursor to imposing retaliatory tariffs.

The 37 member-states of the Organisation for Economic Co-operation and Development (OECD) are currently negotiating a global replacement for national DSTs, aiming for a mid-2021 agreement. The OECD countries that already have DSTs have generally promised to revoke them in the event of an OECD agreement.

DSTs have been disparaged by many economists and raise relatively little income: bodog sportsbook review for example, the French government estimated its DST would raise €400 million in 2020, which (based on 2019 corporate tax revenues) would amount to less than 1 per cent of corporate profit taxes. Nevertheless, DSTs have become totemic. Many governments believe – probably correctly – that the increase in the number of countries imposing DSTs makes the US more likely to change international tax rules to agree to a global replacement (and less likely to impose retaliatory tariffs). The EU member-states with DSTs generally want the global replacement to be a ‘market jurisdiction tax’, which would give the jurisdiction where a customer or user is located an agreed right to tax a share of a foreign producer’s profits.

The Biden administration has its own agenda in the OECD negotiations: the US is pushing a proposal for a global minimum corporate tax rate that could be applied in addition to a market jurisdiction tax. The minimum tax rate proposal would entitle countries to increase taxation on firms’ profits, if those profits were only taxed elsewhere below the global minimum rate. The intention is to reduce incentives for US firms to shift profits to low-tax countries.

On both these issues, a deal based broadly around the current US proposal is a realistic possibility and is in the EU’s interests.

On the DST issue, the US recently began supporting the principle of a market jurisdiction tax as a substitute for DSTs. But if the OECD negotiations fail to reach an agreement, DSTs will remain in place and their number will probably increase. Then the Biden administration would probably impose tariffs, triggering a new round of damaging trade wars. The design of the US proposal suits EU member-states: it allocates taxing rights between jurisdictions based on sales generated in that jurisdiction, which benefits countries with wealthy consumer bases. The proposal will probably only result in a minimal reallocation of the tax base away from those EU member-states in which the tech giants currently book profits (such as Ireland and Luxembourg). The proposal also corrects many of the defects of bodog sportsbook review DSTs – for example, it would tax a share of producers’ profits, mitigating the impact on firms which are yet to achieve profitability. Most importantly, the proposal provides a face-saving path for EU member-states to remove their own DSTs.

To read the full insight piece by the Centre for European Reform, please click here. 

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Our discussion suggests that the latest developments in digitisation, although affecting both trade in manufactured goods and trade in services, is having and will have even more in the future its greatest impact on trade in services. Hence, we share the view of Baldwin and Forslid (2019) that globalisation is entering a new phase, driven by digitally-delivered trade in services. We also share the view of van der Marel (2020) that ‘globalisation is not in decline, but simply changing’.

During the previous phase of globalisation, which was and is still largely driven by GVC trade in manufactures, a growing number of industrial activities were outsourced to countries with much lower labour costs than Europe (and within Europe from western to eastern or south-eastern countries), with goods then exported from these countries to various destinations, including Europe. During this phase, industrial employment in Europe and in other advanced economies declined substantially, although the value of industrial production continued to increase. This came about as companies concentrated on high value-added activities, outsourcing lower value-added ones and replacing manual labour by robots or other machines. But overall employment did not decrease. It simply shifted to services but with significant socio-economic consequences, including in terms of the organisation of work, female participation in the labour force and income distribution.

The new phase of globalisation, which is only now starting, will now also transform employment in services, at least in those activities that were hitherto non-tradable (or little tradable), which will now become not only potentially deliverable digitally but actually digitally delivered. This will provide new employment opportunities for some European workers, but for others who have been sheltered from international competition, it could mean that their jobs will be outsourced to other parts of the world where there is an abundant well-educated labour supply. Whether or not total employment opportunities will remain unchanged and only job composition will change is obviously impossible to predict. During earlier phases of technological transformation and globalisation, there was more change in the composition of jobs than in the number of jobs, though there was also a reduction in the number of hours worked per person and a welcome increase in leisure.

What role can and should policy play to accompany such transformation? We see two different areas: domestic policies and trade policy.

The main relevant domestic policies are education, training and retraining, and other social policies aimed at equipping people to master digital technologies and adapt to change. More than ever, societies with flexi-security policies, like the Nordic countries, which combine high quality education and people rather than job security, will be best prepared to manage the digital transformation. But these policies are expensive, so they require states to be able to raise sufficient resources, including by taxing digital activities.

As far as trade policy is concerned, the European Union has an interest in improving its access to markets where the level of restrictiveness on digital services trade is high. According to Ferencz (2019), the OECD digital services trade restrictiveness index (DSTRI) for 2018 was equal to 0.2 or less in all EU countries (except Latvia and Poland) but nearly 0.4 or more in countries like Brazil, China and India 8 . If successful, the on-going WTO plurilateral negotiations on e-commerce – defined by the WTO as ‘the production, distribution, marketing, sale or delivery of goods and services by electronic means’ (and therefore similar to the notion of digital services used by the OECD and in this briefing) – may produce a reduction in trade barriers. However, we share the viewpoint of Hufbauer and Lu (2019) that multilateral disciplines in digital services will need to be complemented by bilateral and/or regional agreements to deliver significant improvements in market access.

We close by reflecting on the consequences of COVID-19 for the digital transformation and digital trade. Before the crisis, the trends we discussed in this briefing were already clear. What was not clear, however, was the pace at which the transformation would take place. There is no doubt that the crisis has accelerated this pace. Teleworking has become a reality for large segments of the population and is here to stay, although not at the level that it reached at the peak of lock downs. And with teleworking becoming ubiquitous, telemigration, which was still considered not long ago as belonging to the distant future, is sure to soon follow. More generally, we should now expect that the new phase of globalisation driven by digitally-delivered trade in services will unfold more rapidly than we had anticipated. We should be prepared for it.

To read the full analysis, please click here.

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