Global businesses and local taxes

Posted by on June 4, 2020  /  0 Comments

As suppliers of public goods (policy relevant research), we at LIRNEasia know the importance of taxes. If there were no taxes, there would be no Internet. Much of the research being done today on multiple aspects of the response to COVID-19 is funded by taxes, including the flood of scientific articles that we are struggling to keep up with.

The problem is that taxes have traditionally been levied on businesses located within the boundaries of the nation state. Tax is coercive, so in essence tax collection requires the ability of the state to audit tax declarations and to throw people into jail if they lie to the state or if they fail to pay taxes that are due. This generally leads to the pragmatic solution of taxing those who have a legal presence in the country: citizens and authorized residents living in the territory; companies with a registered office within the country. Some oddities exist such as the US practice of taxing global earnings of companies, citizens and legal residents. In the case of citizens and legal residents, they are subject to US tax, even if they live abroad, permanently.

Many of the most profitable companies today are suppliers of digital platforms, broadly defined. A classic example is Airbnb, where the buyer of accommodation services is in country A, the seller is in country B, and they discover each other and transact on platform supplied by Airbnb, registered in the US. The buyer remits the money to Airbnb, which deducts its fee and remits the rest to the seller. It is a common practice to charge sector-specific taxes from suppliers of tourism services in order to fund the public goods that make the destinations attractive and to cover the costs to the localities by the visitors. It’s difficult, but not impossible, to levy these taxes on the sellers of the accommodation services. Government must compel them to register and must have to ability to monitor the funds coming in from Airbnb. Alternatively, government can work with Airbnb, which will collect the taxes and remit in bulk to government like many other companies. But Airbnb is outside Sri Lanka’s jurisdiction.

I tried to get this conversation going while I was in government and put the parties together, but it did not proceed for whatever reason. Now various governments are going for broadbrush solutions. Will they succeed? Will what works for large countries such as India, work for small countries? Or will it be another domain where the big boys get what they want, and the little countries watch from the side? These are the issues discussed in the New York Times this week:

At issue are efforts spreading across Europe and beyond to impose so-called digital services taxes on economic activity generated online. Those taxes deviate from many traditional international tax regimes by affecting revenues earned by a company where they are generated — regardless of whether the company has a physical presence there. For example, India imposed a 2 percent tax in April on online sales of goods and services to people in India by large foreign firms. The European Union has revived its push for a similar tax as a way to help fund response measures to the coronavirus.

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