French President Emmanuel Macron and US President Donald Trump meet at Winfield House in London on December 3. They have agreed a truce in a spat about taxing Big Tech. Photo: AP
David Dodwell
David Dodwell

A digital tax war is brewing across the world, even if Trump has put a lid on it for now

  • France and the US have backed off from a digital tax war, but they are only kicking the can down the road. Tech giants should pay tax in countries where they generate revenue, and the world has to reach agreement on how to tax them

Benjamin Franklin hit upon one of life’s immutable truths in 1789 when he wrote that “in this world nothing can be said to be certain, except death and taxes”. However, our global multinationals – in particular, our digital titans – have worked fiendishly over the past three decades to prove him wrong. Perhaps not about death, but certainly about taxes.

Their success in slashing their tax bills has generated an existential crisis for cash-strapped governments across the world, in particular since the 2008 global financial crash. And, in Davos over the past week, the situation reached boiling point as France threatened unilateral action to slap hefty taxes on leading American tech companies.
It took a touch-and-go phone chat on Sunday between US President Donald Trump and his French counterpart, Emmanuel Macron, for a massive digital tax war to be averted.

But the tax can has merely been kicked down the road, and if solutions are not found before the year’s end, disputes over who taxes which companies where are likely to escalate into yet another war over globalisation and international trade. Behind France, another 13 economies have plans to introduce digital taxes, and at least 12 more are discussing them.

Arguments about tax as a weapon of trade and investment date back at least a century, around the time places like Panama emerged as tax havens. But the growing global power of multinationals – some with revenue equivalent to the gross domestic product of many countries – and the recent emergence of tech behemoths like Apple, Microsoft, Amazon, Google and Facebook, have injected steroids into the debate.

France’s finance minister Bruno Le Maire reflects widespread sentiment when he argues that governments must stand up to digital giants that have become the equivalent of sovereign states and act with virtual impunity.

The fact that an estimated one third of all exports involve trade within individual companies’ supply chains allows the companies to ingeniously place their profits in economies offering low tax rates, thereby creating huge challenges for governments around the world that depend on tax revenue to fund pension schemes, health and welfare services and education systems.

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Gabriel Zucman, at the University of California, Berkeley, has calculated that between 1985 and 2018, the global average statutory corporate tax rate has fallen from 49 per cent to 24 per cent.


He says over US$600 billion in profits made in high-tax economies are, by methods like debt shifting, offshoring intangible assets and transfer pricing, booked in low-tax locales like Ireland, the Netherlands, Switzerland, Singapore, Bermuda and the Caribbean.

Joseph Stiglitz at Columbia, citing the International Monetary Fund, says that governments lose at least US$500 billion a year because of corporate tax shifting. He notes that in 2018, 60 of the largest US companies, including Amazon, Netflix and General Motors, paid no tax in the US despite aggregating global profits of US$80 billion.

Amazon, the tech giant founded by Jeff Bezos, paid no tax in the US in 2018. Photo: DPA

The Independent Commission for the Reform of International Corporate Taxation (ICRICT) minces no words: “The existing system of international taxation has been exploited by [multinational enterprises] to shift a large proportion of their overall profits to low tax jurisdictions.” Their success has led to fierce global competition for tax and a general lowering of tax rates.

The Organisation for Economic Cooperation and Development says the average tax rate in Asia has fallen to 18 per cent, from 22 per cent in 2000, while the OECD average has tumbled from 32 per cent to 23 per cent. In the United States, Trump entered the tax-cutting fray in 2017 by slashing the corporate tax rate from 35 per cent to 21 per cent.

But, according to the Institute on Taxation and Economic Policy, a total of 379 of the Fortune 500 companies in 2018 effectively paid an average federal income tax rate of just 11.3 per cent.

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This trend – and the ease with which the digital titans have been able to slip profits across to low-tax destinations – has led to a multi-year OECD project to tackle “Base Erosion and Profit Shifting”.


It is the group’s failure to make progress that has led to frustration in countries like France, Italy, Britain, Turkey – and even Indonesia. It explains the attempt by France to break the gridlock by unilaterally slapping a 3 per cent tax on digital companies’ earnings inside the country.

The digital companies have made a chronic problem an existential one because of the ease with which they can generate revenues inside a country like France without having a substantial physical presence.


Because the French move would have a severe impact on US digital titans (it only affects companies with sales of more than €750 million or US$830 million, and revenue of more than €25 million in France), Trump was until his peacemaking call on Sunday threatening tariff retaliation against France, and any other country that followed Macron’s lead.

OECD chief Angel Gurria expressed relief at news of a truce: “A multiplication of tax regimes, a multiplication of systems, a multiplication of taxes, each with different rates and approaches, would really be unmanageable.”


But the OECD is now under orders to find a globally agreeable formula by the end of this year, and in the arid prose of its consultation document last October: “In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence.”

Despite ongoing controversies, there are signs that a basis for agreement can emerge. The accounting geeks will tell you it is all about “sales factor apportionment”, “modified residual profit split” and “global formulary apportionment”, but to put it in words with fewer syllables, technology companies will be pressed to pay tax where their users and revenue are, rather than where they have a permanent establishment. There will need to be a worldwide agreement on the minimum corporate tax rate.

The ICRICT also notes that national taxing authorities “must abandon the fiction that a [multinational enterprise] is made of separate independent entities and can use transfer prices to determine profit allocation”.


It is perhaps inevitable that digital giants have fought fiercely against the proposed tax reforms. But they need to remember that, for most governments worldwide, it is good politics to hammer digital behemoths. Trump and Macron may have managed a truce for now, but the global fight over Big Tech and taxes might have only just begun. Franklin may prove to be right after all.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view