With the rise of the digital economy, transactions have gone transnational. While this is good for consumers it’s not so positive for legislators, regulators and governments seeking to manage and tax this form of virtual commerce. Developing a digital taxation infrastructure is no easy task but if small island states can unlock that revenue it could address their skyrocketing public debt and help the region stave off a looming economic crisis.
Addressing public debt
By 2020, nearly 75 per cent of small states with unsustainable debt will be Caribbean countries, according to the Organisation for Economic Co-operation and Development (OECD). The uneven balance sheet of Caribbean nations is now at crisis level and governments are looking at innovative ways to address the shortfall.
Commonwealth Finance Ministers met in Washington D.C. in October for their annual summit and top of the agenda was transparent and sustainable debt alleviation. Ministers determined that the Commonwealth, which has a combined debt of US$ 2.5 trillion, should bring its collective power to the OECD to lobby for an international agreement on taxing digital services.
“The Commonwealth has a distinctive contribution to make by bringing together nations with developed and developing economies to agree on collective approaches and action towards a fair and equitable global system for taxing multinational businesses in a swiftly digitalising economy,” said Commonwealth Secretary-General Patricia Scotland. “We need a rule-based system that is inclusive, transparent and efficient so that all countries have a means of collecting revenue and are thereby able to avoid accumulating excessive debt. It goes hand in hand with accelerating the gains to be made by addressing climate change and making progress towards achieving the sustainable development goals.”
The Minister of Finance of Cyprus, Harris Georgiades, who chaired the meeting, added: “Disruptive technologies are challenging the financial system by increasing competition and reshaping conventional business models, thereby fuelling the creation of a whole new kind of financial ecosystem.”
A new ecosystem
Every Caribbean citizen who has bought or sold something online is a part of the digital commerce network. Whether shopping on Amazon, subscribing to a web magazine or signing up to Netflix, trillions of borderless transactions occur every day.
And the digital economy is expanding, driven by a powerful combination of consumer demand for more digital applications and services alongside corporations cutting costs by moving online. The term ‘digital economy’ has even been rejected by the OECD, on the grounds that it is not a single segment of the economy but rather integral to the entire financial ecosystem.
This poses several problems from a tax standpoint. Determining a company’s country of residence, establishing where value is created, creating a means of collection – all complicated issues in the modern fiscal environment as traditional taxation definitions and concepts are fast becoming outdated and irrelevant.
Levelling the playing field
Taxation has always been a controversial issue. A heavy-handed government approach has been shown to stifle the private sector, dampening business and slowing economic development. But some of the most vocal proponents of digital taxes come from the private sector itself, with traditional businesses eager to see their virtual counterparts paying their share.
Giving favourable treatment to e-commerce, in the name of technological development and global progress, merely ensures an uneven playing field and an unbalanced and inequitable marketplace. As e-commerce grows, this gap will only widen. According to the International Post Corporation, cross-border e-commerce sales are expected to grow by 141 per cent between 2016 and 2021.
While the consensus is largely in favour of catching virtual business in the global tax net, there is little agreement on how exactly that can be accomplished. Debate so far has centred on several key sticking points. The first, remote taxation – how to treat businesses who are physically present in one jurisdiction and yet are serving customers in another. The OECD is currently in the midst of public consultation on this point and proposes a new regime, based not on physical presence but the consumer’s jurisdiction. Under this approach, countries could establish a specific sales threshold which, once reached, would give them taxation rights.
The OECD Inclusive Framework, of which Saint Lucia is a signatory, is also discussing whether there should be a global minimum tax that would discourage businesses from shifting to low-tax jurisdictions. However, this would be a hard sell for those countries, many of whom are in the Caribbean, who rely on tax competition as a revenue source.
Another concern particularly relevant to the small states of the Caribbean is indirect taxes, such as VAT or customs duties. While these types of taxes are considered small value and difficult to apply to digital products, they are a steady source of income for island governments.
Collection is arguably the biggest barrier to digital taxation. In the absence of a consistent, clear and uniformly enforced system of collection and penalties, there will be many grey areas and loopholes that digital multi-nationals will be all too happy to exploit. There are also valid concerns over privacy and data collection when tax information is liberally harvested and disseminated around the world.
The World Trade Organization, the OECD and the G20 are all wrestling with the question of digital taxation. Against this complicated backdrop, it is important that the international conversation doesn’t become driven and dominated by the big players. The Caribbean has a lot to gain from an efficient and effective digital tax regime; now is the time to make its voice heard.
