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Digital tax derailed?

24 January 2020

Google, Facebook, Apple and a raft of other (mainly) hi-tech companies have come up with clever ways to reduce their tax burdens.

The most common of these is profit-shifting.

By charging out of low-tax countries for services or IP or licensing, these corporations are able to effectively ramp up their costs in hi-tax countries, often to the extent that they appear to make little or no profit and thus owe little or no tax at those higher rates.

As a result, the total tax rate for these multinationals becomes a tiny fraction of that paid by blue-collar workers who must toil long hours for their earnings.

There is an obvious injustice here and several countries, including NZ have sought to address that injustice by way of levying a "digital tax" on the earnings (as opposed to the profits) of such companies.

Unfortunately, as I warned in an earlier column, this approach was never going to work and this week we saw why.

France was leading the charge with plans to impose its digital tax but they have now postponed that move.

Why?

Because, as I suggested, it was about to trigger a trade/tariff war with the USA.

Most of the multi-nationals that would be affected by a digital tax are US-owned (albeit their financial HQs are often in lower-tax jurisdictions) and the US government (aka Donald Trump) isn't having his country's businesses subjected to foreign "digital taxes".

The USA threatened France with retaliatory tariffs on French-made products.

In speaking with the Wall Street Journal, Trump was quoted as saying “They know that I’m going to put tariffs on them if they don’t make a deal that’s a fair deal”

If that's not the announcement of a tariff war I don't know what is.

Faced with such kick-back, France has decided to suspend its digital tax plans until the end of the year in the hope that negotiations between the two countries could formulate a more bilateral agreement on the problem.

There are hopes that a plan being developed by the Organization for Economic Cooperation and Development to set digital taxes will come up with a solution that is agreeable to both sides.

So is the digital tax concept dead?

Most certainly not.

According to Accountancy Daily, the UK plans to go ahead with its own digital tax in April -- albeit only on a "short term basis".

Australia is still mulling over the idea and the NZ government is still considering the option.

Perhaps, indirectly, the digital tax has been successful insomuch as it has forced the USA to start investigating the alternatives to ensuring that its largest corporations meet their tax obligations elsewhere in the world, instead of dodging them.

However, I would hate to see negotiations break down and countries continuing with the digital tax initiative because, as I suggested originally, it will produce a very nasty tariff war that nobody will win and which has the potential to stifle international trade for decades to come. As a country highly dependent on its export earnings, and as a very small player on the global stage, New Zealand would undoubtedly come out of this far worse-off than the USA or other countries.

Is it time to just cross our fingers and hope?

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