Cash-strapped governments see revenue in US$26 trillion online industry amid pandemic

When Indonesia looked for new ways to fund government spending on coronavirus relief last month, the world’s fourth most-populous nation homed in on a driver of the economy that was still healthy: the internet.

“We decided to tax digital companies with an electronic transaction tax because their sales have soared amid the Covid-19 outbreak,” Finance Minister Sri Mulyani Indrawati said at a press conference. Citing services like Zoom and Netflix, she said “their economic activities are huge”.

And who could blame her. Fiscal authorities staring at gaping budget shortfalls from Canberra to Copenhagen are looking for any form of commerce and consumption they can tax. Coveted well before the pandemic, digital revenue is becoming an even more likely target.

But it will not be that simple. Such efforts are likely to raise the hackles of US President Donald Trump because many of the most popular e-commerce services – from social networking to video streaming and online retailing – are American companies, and he wants those new taxes for his strapped treasury.

While the pandemic decimates large swathes of traditional industries, stay-at-home policies have played into the strengths of companies including Facebook, Apple, Amazon.com, Netflix, Alphabet and Microsoft Corp. Collectively they generated about US$234 billion in revenue in the first quarter, up 14 per cent from a year earlier.

A report last week from the United Nations Conference on Trade and Development said worldwide e-commerce sales totalled almost US$26 trillion in 2018, equivalent to almost one-third of global gross domestic product.

Such windfalls tend to draw the attention of finance ministry officials awash in red ink.

“There are a lot of financial pressures because of the bailouts,” said Stuart Harbinson, a former senior World Trade Organisation (WTO) official and a senior consultant on international trade for the Brussels-based Hume Brophy communications agency. “People need revenue.”

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Six nations in Europe – Austria, France, Hungary, Italy, Turkey and the UK – have already announced plans for a digital services tax and at least six others – the Czech Republic, Slovakia, Spain, Latvia, Norway and Slovenia – have discussed implementing one.

“The digital giants are going to be the main beneficiaries of this crisis, so taxing them has never been more necessary,” French Economy and Finance Minister Bruno Le Maire told Bloomberg.

The health crisis arrived at an already delicate moment in a global effort to develop a multilateral digital tax agreement at the Paris-based Organisation for Economic Cooperation and Development (OECD).

Though the OECD’s negotiators have pledged to forge a comprehensive accord this year, some business groups including the US Council for International Business have called for a negotiating hiatus during the pandemic. The groups cite travel limitations and other constraints as key hurdles to forging a deal this year – something that even top OECD officials acknowledge.

“It’s extremely difficult to negotiate without meeting the people physically,” said Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration.

Among the biggest advocates of an international accord are Trump and US Treasury Secretary Steven Mnuchin, who want to deter nations from unilaterally siphoning tax revenue from America’s internet behemoths.

In February, the OECD said updating global tax rules could be worth as much as US$100 billion in government revenue. That would hardly dent the US$3.7 trillion budget shortfall the US is facing this year, but smaller economies are keen to get a piece of it.

Last year, Trump sent a sharp warning to the world’s financial ministers when he threated to impose 100 per cent duties on US$2.4 billion worth of French wine, cheese and make-up in retaliation for France’s digital services tax.

“If anyone is going to take advantage of the American companies, it’s going to be us,” Trump said last year. “It’s not going to be France.”

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While the threat resulted in a temporary truce with France, the massive economic toll of the coronavirus is emerging as a more persuasive factor for other nations.

Governments are calculating whether the long-term cost of Trump’s tariff threat outweighs the potential for billions of dollars in new digital revenues. Nations are also evaluating whether the threat of Trump’s tariffs holds less sway if America’s hobbled economy is unable to endure a new global wave of damaging tariff wars.

“The threat of the US taking trade sanctions against countries introducing digital services taxes I’m not sure is as efficient as it was before the crisis,” the OECD’s Saint-Amans said during a recent webinar. “The French were very unhappy with the threat and many other countries were hesitant. Now countries are moving.”

New digital taxes could also jeopardise efforts at the WTO to forge a broad e-commerce agreement aimed at harmonising rules in the digital economy.

The European Union, the US, China and 46 other WTO members are negotiating new rules to govern the use of cross-border data flows, data localisation policies, privacy, cybersecurity and a permanent moratorium on e-commerce duties.

Since 1998, the WTO’s 164 members have periodically agreed to continue their practice of not imposing customs duties on electronic transmissions. The moratorium was last renewed in December and will remain until the WTO holds its next ministerial conference, which was postponed because of the pandemic.

But the moratorium and the WTO’s e-commerce talks could unravel if nations decide to impose unilateral digital taxes before the talks conclude.

“Some countries, especially in Europe, are likely to look to digital firms for revenue,” said Joe Kennedy, senior fellow at the Washington-based Information Technology and Innovation Foundation. “The temptation to ignore international rules about the allocation of taxable income to countries will likely increase.”