Advocates abroad for this digital services tax present their case as a question of companies not paying enough in taxes, period. But that’s another fight. At the core of this debate is who should collect the corporate income taxes that companies do pay — not how big the pie is, but how big each country’s slice should be. Europeans’ answer, it seems, is merely that their slices should be bigger.
Certainly, the world has changed since the rules on taxing multinational corporations were written. Today, it is easy for a company to have an economic presence in a country that is disproportionate to its physical presence, the metric used to assess corporate income taxes.
This is the reality the Organization for Economic Cooperation and Development is grappling with as its members attempt to come to a compromise that satisfies both the United States and its tax-hungry peers. The proposal with the most traction reaches beyond tech firms to ask the more general question of how to rethink taxing rights to consider where a corporation’s consumers are located rather than only where the company is located. Maybe France gets a bigger bite out of Google’s profits, but the United States could make some money back on online sales of Louis Vuitton handbags. The challenge is assessing exactly what value a company derives from operating in a given nation that is not captured by traditional models. In an economy that is becoming increasingly digitized, it makes no sense to try to carve out some exception for one especially “digital” sector. Encouragingly, countries at this
Group of Seven summit seemed open to a broader approach.
An arrangement that satisfies everyone might prove elusive, and some countries, including the United States, might prefer to forgo any rejiggering. But leaving France and its cohorts to act alone could create a hodgepodge of policies in which some companies pay taxes on the same earnings twice — and, more dangerously, countries compete in a game of tit-for-tat that leaves everyone worse off. The only solution is to act together.