Big Tech won big in the pandemic. Now some nations say, pay up.

The Explainer

On Feb. 12, Maryland passed a digital advertising tax directed specifically at Big Tech companies, the first of its kind in the United States. This tax struck a particularly sensitive chord, in a year that saw technology companies reap record profits while much of the globe suffered profound loss. 

“At a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and businesses can foot the bill, or big tech can start paying their fair share,” wrote the primary champion of the new tax, Democratic Sen. Bill Ferguson, on his Facebook page. 

In the past year, corporations such as Apple, Facebook, Google, and Amazon have come to be seen as “winners” of a pandemic that has moved much of life online – and strained government budgets. That comes atop long-standing complaints that these highly successful companies don’t pay their fair share of corporate taxes. Hence a growing question: Should profitable tech companies be contributing more to the public good?

Maryland’s new tax adds to dozens of legislatures around the world that have enacted or proposed similar initiatives – and the list is growing. “Digital services taxes” are popular; they bring in much-needed revenue and seem to hold tech giants accountable. But finance experts argue that go-it-alone taxes by states or nations are an imperfect and perhaps even harmful approach. International cooperation may offer a more lasting, and effective, solution.  

What is digital taxation, and why does it matter? 

Taxes on internet commerce come in many shapes and sizes, but the most common is the digital services tax, which is a tax on gross revenue earned from select activities. The taxes normally run between 1% and 10% and target companies making above a certain revenue threshold – that is, Big Tech. That explains why in Spain, the tax is called la tasa Google. In France, its version goes by le taxe GAFA, denoting Google, Amazon, Facebook, and Apple. 

Proponents argue the taxes let countries claim their fair share of revenue on activity that takes place within a country’s borders. Traditionally, multinational firms pay taxes where a business is located, not where customers live. But digital companies earn revenue all around the world. Someone in France, for example, can create original content and post it to Facebook or write a review on Amazon, contributing to a company’s revenue. From France’s perspective, that revenue should be fair game for taxing. 

For the general public, the tax benefits are tangible. Maryland, for example, has committed the $250 million it will raise to public schools. 

But critics see several economic downsides: overlapping taxes for multinational corporations, plus price bumps for consumers and small businesses – customers of Big Tech that may ultimately see the tax costs passed along to them. “This is a rather distortionary tax,” says economist Thomas Tørsløv from the Danish think tank Kraka. “It’s not a particularly good way of raising revenue.” 

The taxes also fuel international antagonism. Last year, the U.S. deemed digital services taxes discriminatory against American companies and threatened retaliation against countries enacting them. 

Does the challenge call for a multilateral solution? 

International dialogue and coordination are exactly what’s needed, say some finance experts. They say current tax systems remain rooted in a brick-and-mortar view of the global economy and don’t do a good job of capturing where income is made in the digital age. 

“The business models of large multinationals are just so different from what the tax system was designed to address,” says Lilian Faulhaber, a law professor at Georgetown University. 

Corporations take advantage of the inconsistencies by finding creative ways to shift profits overseas and reduce their tax bill at home, says Dr. Tørsløv. That’s part of the reason that digital services taxes, which he sees as primarily a political signal to frustrated voters, are popular. They seem to address the concern that companies are not paying their fair share. “This digital service tax is a very concrete way of saying, ‘I actually taxed Google, I actually taxed Facebook,’” he says. 

But Dr. Tørsløv says that international cooperation, not narrow digital taxes, “is probably the only way to solve the fundamental problem” of corporate tax avoidance. 

What’s the way forward?

Professor Faulhaber and other experts warn that without substantial reform to the international system, digital services taxes could even lead to a trade war. 

It may seem like each new digital tax worldwide is proof of growing fragmentation and antagonism – each country looking out for itself to collect the revenue it wants. But the digital tax trend is also evidence of shared concerns that require shared solutions. 

The Organization for Economic Cooperation and Development (OECD) is working with 139 countries on a two-part plan that would make digital services taxes redundant. 

“Pillar One” would reallocate taxing rights by making tax laws less dependent on physical presence – an important issue to tackle given the digital nature of the economy. “Pillar Two” consists of a global minimum corporate income tax to make tax avoidance more difficult for large companies. 

Some countries only want the former, and others only want the latter, but the OECD has been clear that the final agreement will include both parts – a promising strategy, says Professor Faulhaber. 

On April 5, U.S. Treasury Secretary Janet Yellen declared her support for a global minimum corporate tax rate. While her predecessor pulled the U.S. out of talks last summer, her commitment to international negotiations has sparked optimism that the OECD could reach an agreement by this July. 

“You can’t really fix something on your own as a country, in our really interconnected world,” says Professor Faulhaber. She is hopeful that a coordinated international approach can meet a universal demand for reform. “We’re not going to go back to the status quo.”