Over the last decade, we’ve seen nations start to address the tax challenges arising from the digitalization of their economies. They want to ensure that multinational enterprises conducting significant business in places where they do not have a physical presence be taxed in such jurisdictions. And, like any tax reform proposal, consensus can be hard to reach because there is so much at stake.
Look no further than the digital tax France aimed at Facebook, Google, and other American technology giants. French lawmakers voted to impose a 3% tax on revenues that companies make from providing digital services to French users. The country estimated that the tax would raise more than $500 million, helping fill a budget hole as more commerce moves online.
Italy, Austria, and Turkey also have imposed their own digital services taxes on large tech firms, and several other European nations, including the United Kingdom, the Czech Republic, and Spain, have announced intentions to implement such a tax. These countries are frustrated by failure to reach a consensus on a digital tax across the broader European Union.
The national policies on digital taxes have drawn the ire of many businesses and political leaders at a time of heightened tensions over global trade. After decades of flourishing globalization, the specter of higher taxes threatens to complicate long-standing trade pacts and add complexity to the operations of multinationals.
The French digital tax angered the Trump administration, which threatened to retaliate with tariffs on a range of French goods. The two sides struck a truce last month, where France agreed to suspend the tax.
All the uncertainty isn’t good for tax planning. Businesses must rethink how their operations are being taxed internationally. This will result in strategic conversations that go further than the tax department, affecting the way businesses operate internationally.
Many U.S. multinationals are still coming to grips with Trump’s 2017 tax cuts, which made taxation on global intellectual property much more complex.
In light of these changes, we’ve seen businesses in jurisdictions across the world change their tax strategies to abide by filing laws in their primary country of operations as well as countries they’ve expanded into.
Case by Case: Responding to Evolving Tax Policies
As businesses continue their overseas expansion in 2020 and beyond, it’s imperative to adhere to these policies to ensure compliance with tax filings across multiple jurisdictions. Businesses have made these new policies a priority as they prime themselves to not only respond to tax policy changes, but also anticipate forthcoming changes that may arise in the coming years.
For companies that have already abided by new international tax policies, we are seeing these changes develop in a few different ways.
Take the United States, for instance. Under their hybrid-territorial tax system, companies based in the United States can invest their earnings into lower-tax foreign countries to ultimately see a reduced tax obligation. Digital taxes would serve as a counter to this, taxing American companies for their digital operations within their jurisdictions regardless of lower-tax investments. As such, we see the potential for American companies to adapt their tax filings to retain the lower-tax investment benefits.
Some businesses have had an easier time than others adapting to this policy evolution over the last five years. France, for example, has seen difficulty from foreign companies operating within its jurisdiction as they report to a separate financial tax administration with a completely different set of processes that often aren’t as modern or up-to-date. Now that France has backed down on its digital tax, these difficulties may very well continue.
Moving Forward: What to Expect
But the fight to tax the digital economy isn’t going away. Even some critics have called for a more unified approach, rather than country-by-country legislation.
The Organization for Economic Cooperation and Development is trying to get nearly 140 countries to agree on a plan to modernize tax policies to keep pace with the digital economy. But the slow pace of talks has frustrated many nations, and a global agreement may be years away.
For policies that we’ll see moving forward, we can expect businesses will continue to geographically strategize their tax filings for 1) global tax compliance either in response to, or in anticipation of, updated digital tax policies, and 2) maintaining adequate tax revenues in light of increased taxation as a result of these policies.
What remains to be seen, however, is whether a reciprocating effect will occur – that is, if business adaption to digital tax laws encourage the evolution of said laws to further ensure tax compliance. One thing is certain, however, that the only constant in international tax law is change… and businesses need to be proactive in the way they prepare and respond to these changes.
Businesses should take a holistic approach to ensure their global operations are compliant with all jurisdictions they operate within. Whether that constitutes an internal evaluation of present tax filing processes or a consultation with their professional accounting team to determine the best course of action in light of a potential new policy adoption should be to their discretion and may be dependent on the jurisdictions in question.
Jason Gerlis is Global Head of Consultancy Solutions for TMF Group in the Americas.