Digital Tax and its impact on Economic Welfare

 

Digital tax is being contemplated by various economies, globally.  A few jurisdictions where it is about to be enforced after stakeholder consultation is the EU, Asia and the Pacific and is already in place in United States of America.

 

Currently, permanent establishment of digital companies is largely concentrated in the US. Corporations and customers are charged for the goods and services, rendered and consumed, respectively.

 

Digital taxes favor the governments whereas consumers are at a comparable disadvantage due to a possibility of double taxation, that is, they have to pay taxes to their home country and also to the foreign jurisdiction where the company may have its incorporation.

 

The Australian Treasurer according to the Australian Financial Review 2018 stated:

 

“The absence and delay in arriving at a multilateral solution will only continue to invite unilateral action by individual jurisdictions. As a consequence future multilateral action will likely be more focused on harmonizing approaches already commenced, than established.”

 

Various countries have their own model of digital tax. For instance, India is charging an “equalization levy” on businesses. Spain has proposed charging businesses for the users data collected and transferred to third parties. New Zealand is looking at charging for digital activities like advertising to be imposed on companies above a certain threshold. United Kingdom has proposed taxation based on user participation for example on the consumption of social media platforms, search engines and online marketplaces. Malaysia has passed the Service Tax (Amendment) 2019 Bill, paving the way to digital taxation.

 

Digital taxation may improve the fiscal revenue of governments. The revenue collected may not be enough to strengthen the fiscal sustainability of developing countries with low consumption of digital goods and services and countries with little or none, indigenous digital businesses.  It may benefit the OECD countries, where there is an ongoing discussion post Covid-19 to introduce digital taxation due to transfer of businesses to online models and to tax digital businesses across jurisdictions. France has proposed a EU-wide digital taxation model which has seen opposition from Ireland, Denmark, Norway, Finland and Sweden.

 

The impact of digital tax will be manifold to consumers. The after tax, higher cost of digital goods and services will be transferred to consumers. Economics refers to imposition of such a tax as a “deadweight loss” or “excess burden” on consumers and producers and thus negatively impact economic welfare. Lowering taxes can impose constraints on productive government spending for public sector such as defense, income redistribution, education, gender inequality, environment and legal protection; conversely, imposition of taxes may have the opposite effect, which is observed to result in reduction of economic growth. For economies that have yet to see visible consumption and production in the digital sphere, imposition of digital taxes would be counterproductive.

 

The United Nations Sustainable Development Goal 17.1 requires strengthening domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection. Economic growth and governance will ensure that this goal is achieved by developing countries that have demonstrated lower spending on social welfare. The ability to raise taxes is inextricably linked to effective resource allocation and adequate government spending that contribute to welfare.

 

Thus, digital taxation as an international tax can be a useful revenue generation method, however, this may have adverse effects that would lead to economic constraints to both consumers and producer’s surplus and result in deadweight loss to the economy, consequently, may negatively impact economic growth. If introduced, governments must ensure that it is spent on adequately addressing digital divide, financial inclusion and reducing burden to less advantaged segments of the society.

 

Tim Cook, Apple’s Chief Executive Officer has his own version on taxation:

 

“I think it's smart for the US to have some kind of tax revenue for international earnings - if that tax were reasonable”

 

Possibly, Tim Cook’s point of view can be adopted by economies in Europe, Asia, Africa and other regions of the world.

 

Let us know your thoughts on digital tax. Do you believe there is a correlation between Digital Taxation and Economic Welfare?

 

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