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Economy International Taxation

Payback Hour: Apple, Google, and Facebook have all evaded taxes for years. How will 130 countries of the world make them pay billions? (2)

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Not everything is smooth

However, there are much more differences in national interpretations than similarities, which only creates confusion. For example, in India, the local threshold is only 20 million rupees (260 thousand dollars) per year, but in Kenya it is not at all. Rates also vary: from 1.5 percent in Poland to 7.5 percent in Turkey. In France, Italy and Spain, fees are set at three percent, in the UK – two. What is considered the base for the tax, everyone also determines for himself. Austria refers to it only revenues from online advertising, Poland – revenues from video hosting and online cinemas.

The Indian tax, introduced in April last year, covers the earnings of educational institutions that provide online services, which is especially important in the context of the coronavirus pandemic. This approach worries politicians and economists, who say that education in one of the most populous countries in the world may become even less affordable.

In the United States, there are two similar measures at once. Introduced during the 2017 Trump reform, the Base Erosion Tax (BEAT) works as follows: the company’s revenue is multiplied by 10 percent – if the resulting amount exceeds the base for regular income tax (21 percent of income minus expenses), it is paid. Only companies with annual revenues of at least $ 500 million fall under BEAT, and it acts rather as a preventive measure to prevent abuse.

In contrast, Low Rate Jurisdictions Digital Income Tax (GILTI) applies to money already earned and is calculated in a complex manner. Its rate is not fixed and ranges from 10.5 to 13.125 percent. It is levied on a parent company registered in the United States and owning at least 10 percent of a business operating in a low-tax country. The scheme is similar to the taxation of Russian CFCs (controlled foreign companies). Thus, there have been no taxes on foreign income at the federal level since the Trump reform, but they still operate at the level of individual states.

Affiliation of income to a certain state is calculated simply – by the IP-address of the buyer of the product or service. But even here lawyers have questions, because controversial situations are possible. It is not clear to whom to count the deal if a person bought music on vacation abroad, and after returning home, deleted it from his smartphone – or continued listening in his home country. In addition, there are technologies that make it easy to hide the real location of the device, such as VPN services. This also gives rise to the threat of double taxation – a long-standing problem of the world economy, which most countries have solved through the conclusion of special bilateral agreements.

Another nuisance lies in the desire of many companies to shift a new burden onto consumers, effectively making the tax indirect – like VAT. The French authorities are verbally trying to combat this phenomenon, but in practice it is almost impossible. At the same time, no one has canceled the classic VAT – in most countries it applies to online services and goods, including foreign firms (in Russia, this practice is known as the “tax on Google”). Finally, many are intimidated by the uncertainty surrounding digital taxes and their constant volatility. Lawyers advise to constantly monitor and check the legislation of various countries so as not to miss changes and not run into claims from local authorities.

Google tax was introduced in Russia in 2017. The corresponding amendments to the Tax Code obliged foreign technology companies to allocate 18 percent to the budget (later the rate was raised to 20 percent) of the cost of digital goods sold to Russian users and the services provided to them. Corporations must independently register with a special register of the Federal Tax Service. Responsibility for non-payment of tax is borne by the official Russian representative office – if any. The original goal of the Google tax was the need to protect Russian digital companies from unfair competition from foreign competitors.

Due to the heterogeneity and volatility of rules, international organizations and associations continue to try to develop common policies. Its need is recognized by many countries that have already managed to independently introduce a digital tax. They promised to cancel it as soon as a coherent, common alternative appears for all. But until recently, efforts have not yielded concrete results. The OECD has long promised to present a satisfying international standard at the end of 2020, but it never did.

A light in the end of a tunnel

And in early June, the G7 participants nevertheless managed to agree on a single tax with a 15 percent rate. Formally, it is not aimed at the IT sector and should affect all multinational corporations with business profitability (an indicator equal to the quotient of dividing net profit by revenue) of at least 10 percent. But first of all, it will be the tech giants that will fall under it, which even the authors admit. According to British Finance Minister Rishi Sunak, at least 20 percent of the excess profits (everything above the 10 percent profitability level) will need to be paid to the budget of the country where the profit was actually made. His French counterpart Bruno le Maire is confident that 15 percent will be just a “starting point” before further increases. German Finance Minister Olaf Scholz, known for his frugality, called the deal “bad news for tax havens around the world.”

Experts are already expecting that the countries with the strongest economies in the world will be able to replenish their budgets and ease the debt burden that has accumulated during the pandemic. Gita Gopinath, chief economist of the International Monetary Fund (IMF), spoke in the same vein. The agreement is also supported in the United States. Treasury Secretary Janet Yellen called it “an unprecedented commitment that provides a huge boost to achieving a robust global minimum tax.” An experienced official, former head of the Federal Reserve System (FRS), believes that such a move will end the protracted race between countries and “provide justice for workers and the middle class in the United States and around the world.” Probably, this position was influenced by the assurances of the rest of the G7 that not only American companies, but also any companies in general, will fall under the tax.

At first glance, the support from the corporations themselves looks unexpected, which will now have to share a much larger part of their profits (15 percent instead of the current 1.5-7.5, depending on the country). “We strongly support the work on updating the international tax system. We hope that a balanced and lasting agreement will be achieved, ”said Google spokesman Jose Castaneda. His company, and along with other GAFA participants – Amazon, Facebook and Apple – as much as governments, need certainty and stability, even at the cost of additional costs. “We want the process of international tax reform to be successful, and we understand that this may mean that Facebook will pay more taxes, and in different places,” – confirmed the top manager of the world’s main social network Nick Clegg.

The previous shortcomings have not disappeared yet. There is still a lot of controversy over the “ownership” of digital income. Digital giants, verbally supporting the introduction of the tax, will certainly try to come up with new, even more sophisticated schemes involving states and jurisdictions that have not connected to the fees. The authors’ hopes are connected with the meeting of the finance ministers of the G20 (the “Big Twenty”, which includes Russia), which is to be held on July 9-10 in Venice, Italy. It is expected that digital tax will become its main theme. Ahead of the event, the OECD announced that 130 countries support the idea.

Arrived in time

Two days after the announcement from the G7, it became known that the Russian government was preparing to introduce its own tax on the profits of digital companies. Its rate will be equal to three percent, and foreign firms will become payers. It is expected that the collected funds will go to benefits for their Russian competitors, for which a special regime has been in effect this year: 3 percent income tax (instead of the standard 20 percent) and insurance premiums in the amount of 7.6 percent of the salary fund (against the usual 30 percent ). The first few months the budget suffered losses from such indulgences, but now the authorities are going to compensate them.

The infrastructure for the domestic tax is already being prepared. This summer, a law was passed “on the landing” of foreign Internet services. According to him, companies with a local audience of more than 500 thousand people a day will be required to create full-fledged official representative offices in the country and start a personal account on the Roskomnadzor website. The formal reason is the desire of the authorities to control the politics and content of the portals, being able to quickly block information prohibited in Russia. In fact, a similar procedure can be used for tax purposes.

A week later, President Vladimir Putin instructed Prime Minister Mikhail Mishustin to think about how a new 15 percent tax could be applied in Russia – “in order to keep in mind and take into account our national interests.” Meanwhile, the introduction of its own digital tax reduces the chances that Moscow will join the global initiative from the G7 – after all, in this case, general rules will have to be adopted. Some officials even believe that in the current circumstances, Russia is able to become a tax haven for the IT industry and make money on those who do not want to share with others: 3 percent is clearly more attractive for them 15.

Digital companies are playing an increasing role in the global economy. Countries around the world have long struggled to figure out how best to tax them. In the absence of a common approach for everyone, everyone began to solve the issue in their own way, only confusing the situation. In the summer of 2021, a solution seems to have been found, but it is too early to say that the problem is in the past. How the G7 proposal will turn out for the largest corporations affected by the coronavirus of national budgets, traditional offshore companies and for Russia may become clear in the near future.

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