Digital services taxes - consensus approach from all nations needed

Singapore

CONSPICUOUSLY missing from the recent G-7 finance ministers meetings, which participants boasted had yielded a "historic tax deal", was an agreement on how the group would handle taxes on digital services.

With the increasing digitalisation of the world economy, the challenges of ring-fencing tax revenues arising from such services are growing; yet, with digital services taxes (DSTs) already imposed unilaterally by some jurisdictions and deemed unfair by others, an agreement at the G-7 level may not be what the world - and Singapore, in particular - needs.

Addressing the tax challenges raised by digitalisation is currently, and has been for some years, the top priority for the Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework on BEPS (domestic tax base erosion and profit shifting), which consists of 139 member jurisdictions.

In a recent write-up, the OECD recognised that "the Covid-19 crisis has exacerbated these tax challenges even further by accelerating the digitalisation of the economy, increasing pressures on public finances and decreasing public tolerance for profitable multinational enterprises (MNEs) not paying their fair share of taxes".

"With the rise of digitalisation, it would be difficult, if not impossible, to ring-fence the digital economy," said Harvey Koenig, tax partner, Telecommunications, Media & Technology, at KPMG in Singapore.

"With all businesses increasingly finding the need to innovate and digitalise, it has become apparent that any rules to target digital businesses will become redundant quickly, while also appearing discriminatory."

Mr Koenig explained that digitalisation allows businesses to access markets without the need for a physical presence - which poses a challenge to traditional tax structures based on concepts such as permanent establishments. In light of this, he said, certain markets do not collect much revenue from businesses that seemingly operate in those markets through virtual storefronts, online platforms and other digital means.

OECD's Framework seeks to address this via two pillars: Pillar One is focused on determining nexus and profit allocation, while Pillar Two is focused on a global minimum tax - encapsulated in the recent G-7 commitment - intended to address remaining BEPS issues.

Yet, while the G-7 did hammer out a commitment to a global minimum corporate tax of at least 15 per cent and underlined its support for the Framework's efforts in recent talks, it stopped short of discussing how taxes on digital services would be calculated and administered.

And, that may not be a bad thing.

As Singapore's Finance Minister Lawrence Wong had said, in response to the G-7 tax deal, the G-7 group of wealthy nations cannot be the only one setting the rules; all countries need to be involved in a global consensus, to ensure a level playing field across all jurisdictions.

Mr Koenig is of the same view: "The introduction of digital taxes in jurisdictions such as France, Australia and the United Kingdom were unilateral responses that sought to address the difficulty of applying the current tax regime to impose taxes on highly digitalised businesses. (But) the general criticism against these measures is that they are unilateral in nature and will result in double taxation for the targeted businesses."

For example, such unilateral rules tend to target the large digitalised businesses that are mostly headquartered in the United States and so, the US views these measures as discriminatory and has threatened to impose retaliatory tariffs.

"In contrast, the Pillar One and Two proposals are consensus-based proposals involving 139 countries in the BEPS Inclusive Framework, that will be implemented with rules and dispute resolution mechanisms to avoid double taxation," Mr Koenig added.

The G-7 did say it would provide for "appropriate coordination" between the application of the new international tax rules and the removal of all DSTs and other relevant similar measures on all companies, and that it looked forward to reaching an agreement at the G-20 finance ministers and central bank governors meeting to be held on July 9-10.

Tan Ching Ne, digital tax leader at PwC Singapore, said: "What remains to be seen is if the countries including those in our region who have introduced DST are willing to withdraw or reduce the reach of DST."

"This will be largely dependent on finding commonality and agreement on how the global tax package will be implemented. There have already been many reactions including the seeking of exceptions by some countries and industries. The G-20 meeting in July will be the likely platform for further discussions," she added.

As for how such discussions are likely to affect Singapore's position, Kor Bing Keong, GST leader at PwC Singapore, said: "While Singapore does not levy DST, it has already embarked on a journey to modernise its GST (Goods and Services Tax) regime and to align with international norms in levying GST on the digital economy."

He noted that changes were made in January 2020 to levy GST on digital services provided by overseas suppliers or electronic marketplaces to consumers in Singapore, and that further changes would be implemented in January 2023 to levy GST on low-value goods and remote services supplied by overseas suppliers or electronic marketplaces to consumers in Singapore.

"These GST changes are designed to levy GST on domestic consumption which would otherwise be GST-free. They are not directed at countering base erosion and profits shifting. Hence, the recent G-7 announcements should have no impact on our GST positions," Mr Kor added.

In terms of how ongoing developments and upcoming discussions would affect Singapore's stance on DSTs in general, Mr Koenig said: "Singapore would generally not support unilaterally introduced digital taxes. Such taxes will result in double taxation and indirectly penalise the nation's productivity and innovation.

"The essential trade-off in the introduction of Pillar One proposals is that market jurisdictions will give up their right to introduce digital services taxes or similar taxes on the so-called digital economy, in exchange for greater taxing rights over the global profits of the largest multinational taxpayers. Supporting a consensus-based approach is preferred, versus allowing the proliferation of unilateral digital taxes across the region and globally."

Currently, some 10 jurisdictions around the world have already enacted their own unilateral DSTs - in addition to the aforementioned are Austria, Hungary, India, Italy, Kenya, Poland, Spain and Turkey - while at least another eight, including Indonesia, have either announced plans or signalled their intention to do so.

With pressure on nations to implement these taxes only growing in the near term, it means that the risk of uneven and inequitable outcomes, and the rise in business costs and uncertainty that they create will spread.

The need for a well-considered blueprint - one worked upon and supported by countries big and small - is, therefore, acute; and all eyes will be on July's G-20 meeting for the tone and direction it will set in this space.