With increased public spending during the COVID-19 pandemic, cash-strapped governments around the world are seeking ways to increase their tax revenues, such as implementing taxes on online services or finding ways to fairly tax the biggest corporations doing business in their respective jurisdictions.
By far, at least 23 countries across the Europe, Asia, Oceania, and Africa have sought to implement a digital service tax (DST). Their main argument is that prevailing international taxation rules apply to an outdated model of economy.
Along with these countries, China also faces tough decisions around the taxation of tech companies. However, for China, taxing the digital economy could present a much different picture than the rest of the world. Despite being the world’s second largest digital economy, China is semi-isolated from the global digital world by a firewall. In fact, the country is more inclined to tax its booming domestic tech-conglomerates.
According to the World Bank, the world’s digital economy is now equivalent to 15.5 percent of global GDP, growing two and a half times faster than the global GDP over the past 15 years. The rapid expansion of digital economies has sparked debates over whether the current tax rules are still appropriate in the modern global economy.
Large technology multinational corporations (MNCs) have made huge profits by providing digital services across the world. Under existing international tax treaties, they do not have to pay corporate income tax in a given country if they have not marked their physical presence there.
By setting up the regional headquarters in low-tax countries, the world’s biggest digital service providers, mostly American companies like Google, Apple, Facebook, and Amazon (“GAFA”), circumvent taxes in the consumer countries besides paying little or no tax in their country of origin. This has drawn the ire of the UK and the EU with regards to concerns around base erosion and profit shifting in the modern digital world.
In March 2018, the European Commission, the EU’s executive arm, initiated a proposal for a digital service tax. Although the proposal was later rejected at the EU level, some countries chose to implement unilateral measures on implementing DST.
In July 2019, the French Senate passed the bill and became the first country to implement a DST. Other countries soon followed suit. According to the Tax Foundation, as of March 2021, Austria, France, Hungary, Italy, Poland, Spain, Turkey, and the UK have implemented a DST. Belgium, the Czech Republic, and Slovakia have published proposals to enact a DST, and Latvia, Norway, and Slovenia have either officially announced or shown intentions to implement such a tax. Outside Europe, India, and Kenya have also implemented the DST, while Australia, Singapore, Malaysia, and Indonesia tweaked their current tax rules. (While the US disapproves of the digital tax, that it feels unfairly targets American companies, it is keen to adopt changes to international rules that will impose a minimum corporate tax.)
However, since most tech giants are American companies, the Office of the United States Trade Representative has labeled the digital service tax as discriminatory. Under the previous president, the US decided to slap tariffs on US$1.3 billion of annual French imports, including cosmetics and handbags. But this was suspended after negotiations.
The US government also proposed to impose additional tariffs on six more countries – Austria, India, Italy, Spain, Turkey, and the United Kingdom. The imposition of these retaliatory tariffs has been temporarily suspended as countries seek consensus over changes to rules of international taxation, to which the US has agreed to prioritize.
For other countries, the purpose of implementing a DST is taxing multinational companies fairly, based on their market profits, and to address international tax avoidance. But China generally doesn’t have this problem. At present, the main issue facing Chinese policymakers is taxing its domestic technology companies and their monopolizing the industries of the future.
China’s digital economy currently accounts for one third of its GDP. According to the estimation by the China Academy of Information and Communications Technology, in 2019, China’s digital economy reached US$5.52 trillion, accounting for 36 percent of its GDP, making it the world’s second largest digital economy.
The COVID-19 outbreak has further boosted this digital economy. According to the State Statistics Bureau, from January to November 2020, China’s total retail sales fell by 4.8 percent year-on-year, but online retail sales increased by 11.5 percent year-on-year.
Given the large scale and rapid growth rate of China’s digital economy, how to tax it is an important concern for the government but it is not simple. It involves tax equity between the real economy and the digital economy, as well as the fair sharing of the ownership and value of user data between the public and internet platforms.
As in many parts of the world, a few technology titans increasingly dominate Chinese consumers’ daily lives, from online shopping to mobile payments to food delivery and to car hailing. Having noticed this, in the past few months, China has been revising its antitrust law and cracking down on anti-competitive behaviors by tech companies. Since December 2020, regulators have fined dozens of companies, including Alibaba, Tencent, and Baidu.
Ultimately, Chinese officials acknowledge the need to tax e-commerce and tech titans who enjoy a profit-making access to a large database and huge consumer traffic, such as like Alibaba, Tencent, Meituan, and Didi Chuxing.
Technology corporations like Alibaba and Tencent gather copious amounts of user data while providing their services. Some government officials think it is necessary to clarify the ownership and rights of the data.
Yao Qian, Chief of the Science and Technology Supervision Bureau of the China Securities Regulatory Commission (CSRC), thinks “user data is like precious mineral mines. China should consider levying a digital tax on tech companies to enable citizen-users to share in the revenues generated by their information”, Yao said.
Guo Shuqing, Head of China’s Banking and Insurance Regulatory Commission (BIRC), said that there was a need to clarify data rights as it viewed data as an economic contributor like labor and capital. “Big Techs have de facto control over data…It is necessary to clarify data rights of different parties soon, and improve data flow and pricing mechanism,” Guo said.
However, China’s study on implementing a digital service tax is still at the early stage. Debates continue over whether data is taxable, where data is owned, how data will be priced, and how personal data and privacy will be protected.
In addition, Wang Yongjun, professor at the Central University of Finance and Economics, pointed out another interesting question – tax base erosion and profit shifting could not only exist among different countries but also among different regions. In China, taxes on digital economy operations are paid mainly in developed regions, such as Beijing, Shanghai, Shenzhen, and Hangzhou, while underdeveloped regions are at a disadvantage for collecting such taxes, aggravating imbalances among regions, Wang said when being interviewed by Caixin.
At present, China is considering various approaches to tackle these issues – to optimize the existing tax system by clarifying taxes related to the digital economy or to introduce a new DST. Alternately, the country could take both approaches simultaneously.
As DST has received increasing attention on the international agenda, China also plans to play a more active role in formulating uniform tax rules for digital firms.
In October 2020, Qiushi, the leading official theoretical journal of the Communist Party of China (CCP), published an article written by Chinese President Xi Jinping, which called on China to actively participate in the development of international standards for digital currency and digital service taxes.
Yet China has no concrete plans and appears to be prudent on implementing a DST for foreign tech giants, especially American companies.
Zhou Xiaochuan, former governor of China’s central bank, warned that the country needs to avoid the potential of a “new tariff war”. Given the spat over digital taxes between the US and Europe and the protracted trade war between the US and China, China appears to be unwilling to intensify conflicts with the US.
“A new tariff war would not be good for the globalization advocated by China, to multilateralism and to the rules-based international order, and if it occurs, it is likely that most of the countries will respond by showing protectionism. That is why we need to study [the digital taxation issue],” Zhou said.
The Group of 20 (G20), one of the main global organizations pushing for a global tax reform, is going to have a meeting in July and hopes to reach a consensus over the digital tax issue. China as one of the member countries will be involved in the negotiations.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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