The Digital Service Tax Emerges as a New Threat to American Innovation

Mitchell Nemeth
5 min readJul 18, 2020
Source: Unsplash / Guillaume Périgois

Beyond the tidal wave of clickbait about COVID-19 and the latest President Trump bombshell, some European Union countries, namely France, have been considering levying an international tax called the “Digital Services Tax” (DST). This tax presumes to collect revenue by taxing gross revenue streams of digital companies. American government officials and industry representatives have alleged that this tax discriminates against American companies, specially Amazon, Facebook, and Google.

The argument follows: the digital economy allows certain companies to avoid a physical presence in high-tax countries. Due to globalization, digital companies may seek to shift some of their physical presence away from high-tax jurisdictions to lower-tax jurisdictions. Politicians in high-tax countries then view this behavior as “unpatriotic” or “unacceptable.” In order to recoup “lost government tax revenues,” these politicians want to implement a tax that undermines international legal norms.

A broader overview of the digital economy paints a far more challenging picture. Globalization, advances in digital technology, more competitive trade, and decades of tax competition have allowed multinational corporations (MNCs) to operate from all corners of the globe. Fewer barriers to trade and digitalization have continued to build a far more competitive environment for taxation.

High taxation operates as a barrier to conducting business in a globalized economy. One may address this challenge by reforming the tax code and lowering effective tax rates or providing incentives for companies to move their operations. The Information Technology & Innovation Foundation (ITIF), a nonpartisan research and educational think tank, agrees with this proposal.

Many foreign jurisdictions, instead, want to apply industry-specific taxes in order to pillage the most successful companies in the world. In fact, the international Organization for Economic Cooperation and Development (OECD) has been leading an effort, which according to the Tax Foundation, to address “the tax challenges of the digitalization of the economy” and address “tax avoidance through a global minimum [corporate] tax.” Respectively, the OECD labels these twin matters as Pillar 1 and Pillar 2.

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Mitchell Nemeth

Risk Management professional here to provide unfiltered commentary. Views expressed are mine alone.