– And on the Internet there is a dramatic conflict about future taxation. Few subjects are more complex than tax rules, but Internet tax policy multiplies the complexity as it includes activities taking place in cyberspace regardless of borders.
Since ancient times, basic international tax principles have developed, in which governments tax only people in their territory, whichever government each government decides. These concepts were complicated in the last century when international mail, telephone, data and jet travel emerged, resulting in complex efforts to define what it means to “be” in a country and be subject to its taxes. The relative financial stakes in cross-border, non-trading, economic activity during the last century were modest compared to today.
As the 20th century drew to a close, things began to change, as the combination of the digitization of assets (such as software), globalization, and the easy transmission of anything anywhere via the Internet began to become complex and of increasing economic importance. cross-border economic activity – and thus taxation. Governments were confused and concerned by the potential erosion of their tax base.
The first major Internet tax policy move in the US came in 1998 with the passage of the Internet Tax Freedom Act, which prohibited US state and local governments from taxing things sold over the Internet when such things were taxed in the physical world. and by levying a tax on Internet access, as such access was already taxed at the telecommunications level. (Full disclosure: At the time, I was the IBM executive responsible for directing their policy on the Internet tax, and the main theme was protecting a baby industry from discriminatory behavior.)
This “leave the Internet alone” philosophy combined with the end of 20th Century tax rules that enable countries to attract investment by offering lower tax rates to multinational enterprises, regardless of where most of their actual business is conducted (so-called “tax havens”). It is possible to sell via the Internet to customers around the world and still pay taxes only in a “tax haven”. But perhaps something more important was happening. Services (from banking to entertainment) and merchant advertising began to migrate from physical buildings to the Internet. By the 2010s, a large percentage of services had left the streets, where governments could easily levy taxes, and moved to cyberspace, where locations and tax liabilities were difficult to establish or enforce.
To complicate matters further, many of these Internet services were not even “sold” to local “consumers” (in the sense that the local consumer actually pays the service provider.) Instead, many Internet-based services were technically based. Typically “sold to multinational advertisers who were actual “customers” and then provided “free” to local consumers. In this case, the actual “sales” by Internet service to the merchant advertiser in “cyberspace or in an attractive jurisdiction” (This is, of course, where Internet taxes and privacy policies intersect: for advertisers, cyberspace can be more attractive than advertising broadcast or publisher advertising, because by carefully monitoring the activities of end users , online service providers can target customers accurately. The advertiser wanted to reach without any wasted advertising dollars.)
The combination of these forces gave rise to Internet tax turmoil in recent years. In 2018, the Supreme Court approved Principal 20. rejected one ofth Century Tax Theory that sellers had to be a physical “alliance” in an area for that area’s government to tax them. Previously, an intergovernmental organization, the Paris-based OECD (home of most international tax dialogue for the past half century) was caught in the Internet tax vortex. This was partly because some EU members felt that in an era of digital assets and seamless online sales, they could serve as a tax haven for major businesses trying to easily access EU markets. and in doing so can attract jobs, new tax revenue and investment to their countries. – causing great pressure from within Europe to rewrite the old tax rules.
The first big shot in Europe came from France in 2019. Within the United States, from Maryland in 2021. Both jurisdictions put forward an earlier revolutionary proposition, which I’ll explain as “I don’t care where your headquarter/located or you’re charging my consumer fees…if you’re big and doing a lot of online business.” People of my area, you have to pay a tax here.”
A dozen European countries joined France, and even more outside Europe did so. The US response was to accuse Europeans and other countries of trying to change accepted tax rules to retaliate against successful US companies, and the US threatened retaliation.
The emerging 2020 tax conflict between Europe and the US supercharged the OECD effort (which grew to more than 130 countries) to find compromise and create a new international tax paradigm, which the OECD process did in 2021.
Even the most cursory summary of the OECD’s tax deal would take volume, but in my view, for large-scale oversight, it would mean abandoning their plans to impose an Internet-specific tax on large companies to the nations of origin. and instead agree to a global minimum of 15 percent tax rate on all large multinational businesses (eliminating narrow Internet targets and reducing the threat of tax havens) and allowing nations to tax all large multinationals , where they generate income proportionately rather than where the company is “located”.
Both concepts are revolutionary: taxes would be based on where a large company sells from — not from — and no country could impose a rate of less than 15 percent. Perhaps most important, conflicts between the US and Europe and other taxing countries will be avoided (for now.)
But the agreement is in the final stages of preliminary approval. So, while we pay our taxes, the world waits to see if the taxpayer comes for the internet.
Roger Cochetti provides consulting and advisory services in Washington, DC. He was a senior executive with the Communications Satellite Corporation (COMSAT) from 1981 to 1994. He also directed Internet public policy for IBM from 1994 to 2000 and later served as Senior Vice President and Head. Policy Officer for VeriSign and Group Policy Director for CompTIA. He served on the State Department’s Advisory Committee on International Communications and Information Policy during the Bush and Obama administrations, testified several times on Internet policy issues, and served on the advisory committees of the FTC and various United Nations agencies. He is the author of the Mobile Satellite Communications Handbook.