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Departure from past practices

By ZHANG LIN | China Daily | Updated: 2020-07-14 07:33


International tax principles need updating to accommodate the digitalization of the economy

The Office of the United States Trade Representative announced on June 2 that it had initiated an investigation under Section 301 of the Trade Act of 1974 into Digital Services Taxes (DSTs) that have been adopted or are under consideration by many of the country's closest trading partners-Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.

This provision gives the USTR broad authority to investigate and respond to a foreign country's action which it considers may be unfair or discriminatory and negatively affect US companies.

DSTs could be the trigger for a trade war between the US and Europe or even world widespread.

The issues highlight the conflicts between countries over "digital sovereignty "and pose a huge challenge to the shaping of new tax rules for the digital economy.

For US multinational digital service companies faced with additional tax burdens, building a "neutral, stable, and transparent" international tax rule would be beneficial. However, the federal government seems to have a different view, and its unilateralist approach has weakened the authority and reduced the effectiveness of international organizations such as the Organization for Economic Cooperation and Development and the World Trade Organization.

The US is adopting a double standard on the issue. It is taking advantage of international laws as a measurement of the legitimacy of DSTs, but it is not willing to resolve the dispute via the WTO, neither is it relying on the OECD for further interpretation and coordination of the rules. Instead, it is adhering to the idea that its domestic law is superior to international law, and threatens to impose high tariffs for "violators".

But the US' withdrawal from negotiations cannot stop the spread of DSTs worldwide, and countries with continued tax base erosion have firmly actively adopted them and endorsed a global tax framework for digital services. Also, the introduction of DSTs in many countries highlights the urgency of establishing new international tax rules in the era of the digital economy.

As of June 2020, 14 EU member states have begun to implement, or expressed support for DSTs. Southeast Asian countries such as Singapore, Indonesia, Malaysia, and Thailand are considering levying value-added tax on foreign network service providers, a policy that has produced a huge demonstration effect among countries such as Australia, Canada, Japan, and New Zealand.

The US' withdrawal from negotiations makes it more difficult to achieve global settlement measures under the multilateral framework. As a consequence, more and more countries are likely to take unilateral DSTs as a short-term measure to protect domestic targeted small-and medium-sized enterprises, retain the potential value of domestic users, and change the status quo of tax base erosion.

Punitive measures of high tariffs are not helpful to coordinate the different proposals for international tax reform and overcome the theoretical and technical difficulties.

The Section 301 investigation requires that if DSTs are damaging to US companies, then the US president has the right to increase tariffs; stop trade reciprocity, bilateral trade agreements, bilateral investment agreements, or tax treaties; impose import limits; or take punitive measures like levying other expenses.

Last December, the US threatened to impose up to 100 percent import tariffs on $2.4 billion French exported commodities including wines, handbags, cosmetics and cheese. It is such a "mismatch" to take "traditional" tariff measures in response to "updated" international tax rules with much higher standards.

Instead of threatening to withdraw at this stage, the international community should make joint efforts to speed up multilateral negotiations to solve the theoretical and technical difficulties in the OECD, with a view to achieving a reasonable distribution of the international tax base.

The tough stance and punitive measures of the US will, to a certain extent, delay the implementation of the DSTs, but its political games will also increase the risk of trade conflicts.

On the one hand, the DSTs will create huge financial revenues for the levying countries. According to estimates by the UK Treasury, it is expected that the DSTs will increase the UK's fiscal revenue by 275 million euros ($311 million) in fiscal year 2020-21, and will generate 440 million euros in 2023-24. France is also expected to increase fiscal revenue by 560 million euros per year. Even if the US retaliates with high tariffs,

On the other hand, trade policies could be a political bargaining chip in the negotiations. The US' arbitrary behaviors could force European countries to take countermeasures, such as speeding up investigations of unfair competition in online platforms and digital advertisements, and establishing new antitrust rules in digital platforms. All those things could bring increasing risks to the global economy.

For China, it would be best to not simply support or deny DSTs, as any unilateral measures are not conducive to the coordination of new international tax rules. Due to the challenges posed by the digital economy worldwide, we should adhere to the principle of fairness, neutrality, transparency and stability in shaping international tax rules, as well as support the rise of a global multilateral tax governance system.

China should take an objective and forward-looking perspective on the digital economy. It should not only strengthen international cooperation with the OECD, but promote cooperation with United Nations Committee of Experts on International Cooperation in Tax Matters to ensure that developing countries can participate in international discussions on taxation policies for the digital economy.

The author is a fellow researcher of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

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