Why ‘Digital Taxes’ Are the New Trade War Flashpoint

Internet companies have long been the target of complaints that they don’t pay their fair share of taxes. The backlash has only gained momentum during the pandemic as deep-pocketed technology giants benefited from more online commerce and cash-strapped governments searched for new sources of revenue. Slow progress in global talks to thrash out new tax rules for the internet age has already led some nations to impose so-called digital services taxes – levies on local sales of companies such as Facebook and Google. The U.S. asserts that such taxes are less about fairness and more about hobbling American firms, opening another front in the trade war.

In a globalized economy where data is the raw material, it may no longer make sense to tax companies based on their physical presence, or to use century-old rules for allocating profits to different jurisdictions. In the European Union, for example, authorities say the average tax rate for a digital business is 9.5%, compared with 23% for others. That perceived injustice became a hot topic after the 2008 global financial crisis, when a public outcry over bank bailouts spurred governments to tackle tax evasion. Work at the Organization for Economic Cooperation and Development, a club of 37 mostly rich countries, spawned a crackdown on havens and loopholes but did less at first to address the thorny issue of how taxing rights are shared among countries. In an effort to tackle that, the OECD has been working with 140 countries in recent years to define rules, along with a broader framework to establish minimum corporate tax rates.