French Finance Minister Bruno LeMaire announced this week that Paris would impose a digital services tax (DST) effective January 1, 2019. LeMaire and other French officials have argued that such a measure would help to ensure that large digital services providers, which happen to be American companies, pay their “fair share” in taxes.
France has pushed for adoption of a DST across the European Union, but action has stalled amid legitimate concerns voiced by other member states. To be sure, France is not the only country pursuing the idea: The UK, Spain, Italy, and other countries around the world have announced they will impose such a tax or are actively contemplating it. Unfortunately, these proposals would have significant unintended consequences.
The business community supports efforts to modernize the international taxation system to adapt to changes in the global economy. However, nations should avoid taking unilateral actions since such actions will erode trust and lessen prospects for international agreement. Any digital tax measures should be adopted only after constructive dialogue, such as the one underway at the OECD, about how to achieve this shared objective in a coordinated way.
Global policymakers should follow a few simple guidelines as they pursue any digital tax measure:
- Be clear about the issue being solved for and develop solutions that are crafted to avoid unintended consequences, including a clear definition of “digitally enabled services.”
- Ensure industry-specific neutrality, respect the principle of national treatment, and avoid special tax benefits or penalties targeted at one industry versus another.
- Levy tax on profits, not revenues. Proposals to tax revenues improperly ignore the costs associated with sales and would dissuade investment and innovation.
- Provide simple, predictable, and easy to understand tax rules to improve compliance and reduce the cost of tax administration.
- Include realistic transition rules to provide adequate time for implementation and help minimize economic hardships businesses may encounter in transitioning to tax system changes.
French officials recognize the value of the OECD effort but complain that the process is moving too slowly. They’ve suggested that any measure adopted by the EU would be temporary, to be superseded by whatever is finally agreed upon at the OECD. Such suggestions are hard to believe. It’s hard to turn off the tap – or even adjust the mechanism – once that revenue starts flowing.
France has said its new measure will enter into force less than two weeks from now, yet the actual language of the measure has not yet been made public. There is no way to know whether the definitions are clear and the rules are understandable, who will be required to pay, whether there is a sufficient transition period, and so on. There is nothing “fair” about that.
A fundamental tenet of pro-growth tax policy is that the marketplace, not the tax system, should allocate capital and resources. It makes sense to craft rules that take into account the digital transformation of the global economy, but clarity and consensus at an international level – about who’s being taxed, what’s being taxed, compliance rules, and a realistic implementation period – are essential to a reasonable outcome.