Digital Services Tax: A global comparison

Nabila Ahmed looks at how some countries have tried to solve the problem of tax avoidance amongst big tech companies.

For the past 6 months Ethical Consumer has been running a campaign to get the tech giants of Google, Amazon, Facebook, Apple, Microsoft and Netflix to pay a windfall 10% Digital Services Tax rate during the pandemic.

This could raise around £1.5bn which, on its own, could cover a 3% pay-rise for all NHS staff who have put their lives on the line to help us see through the Covid-19 pandemic. Given the tech giants have all posted record profits during this period, we feel it is only fair for some of these gains to be redistributed.

The growth of the digital economy both before and during the Covid-19 pandemic has been remarkable, yet it has long been considered that current international tax rules are antiquated and unable to properly tax multinational tech corporations.

International tax system

The Organisation for Economic Co-operation and Development (OECD) has been hosting negotiations since 2015 with over 130 countries in an attempt to adapt the international tax system. However, slow progress has meant that, increasingly, countries are taking matters into their own hands. Currently, 8 European countries and 3 non-European countries have implemented a digital services tax, with many more countries debating and/or preparing to pass similar legislation. The countries which have implemented a digital services tax include:

European Digital Services Tax
Austria 5%
France 3%
Hungary 7.5%
Italy 3%
Poland 1.5%
Spain 3%
Turkey 7.5%
United Kingdom 2%
Non-European Digital Services Tax
Australia 10.5%
Canada 5%
India 2%

For a more comprehensive breakdown of different countries' digital services taxes please click on this link.

Other Countries

In terms of pioneering the use of taxes on digital services, India is at the forefront. In 2016, the government passed a 6% equalization levy on revenues generated from digital services, but restricted it to online advertisement services. In 2020, they went a stage further and implemented a 2% digital services tax which is broader in its scope, extending to all kinds of digital transactions.

One of the most recent countries to implement a digital services tax is Spain who, as of 16th January 2021, introduced a 3% digital services tax. One of the reasons for the passing of the digital services tax is due to a much needed increase in governmental revenue to fund the increases in public spending promised by the government. 

The growing role for digital businesses

The current Covid-19 pandemic has accelerated the trend of digitisation, with a larger proportion of most countries' GDP being taken up by the digital economy. In fact, data and data-fueled artificial intelligence is projected to generate $13 trillion in new global economic activity by 2030.

The very nature of artificial intelligence means it naturally trends towards 'winner takes all' economics within an industry [1]. Coupled with the potential to wipe out huge numbers of jobs within entire industries, this means that giant tech companies now wield increasingly large amounts of power and wealth. Since the digital economy is growing at such a rapid rate, this has led to calls for a new way to measure the digital economy called gross data product. This would allow the accurate capture of the emerging measure of the wealth and power of nations, who will be using data and AI to grow.

One country that is setting this trend is China, with its digital economy having already reached 36.2% of its total GDP (35.8 trillion yuan/$5.5 trillion) in 2019. Given that China’s digital economy has grown so much faster than the traditional economy, this has encouraged policy makers there to consider introducing a digital services tax too.

The need for tax reform becomes more urgent

As of 2020, the digital economy in the UK comprises 7.7% of GDP. Inevitably the 2021 figures will be larger due to the accelerated digital landscape during the pandemic. Currently, it is predicted the digital economy will grow by £74bn by 2025, increase by £127bn by 2030 and be £232bn bigger by 2040, however it is very possible that these figures are an under-estimation. A 10% digital services tax on these profits would respectively generate £7.4bn, £12.7bn and £23.3bn, which could then be used to fund our NHS.

Of course, most people (including the new Biden administration) hope that agreement over the OECD's new international rules will be implemented long before then. There is no doubt though, that the rise of digital services taxes, and calls for their increasing role, are helping to give these negotiations the sense of urgency they really need.

In the meanwhile, consumers can make a difference through what they do online. Read about finding alternatives to Amazon, our guide to ethical online retailers, our guide on streaming services, and about the windfall digital services tax campaign.

References

1. Kai-Fu Lee (2019) AI Superpowers: China, Silicon Valley and the new world order, p19