How the Race to Digital Taxation Threatens the Global Marketplace

Tax leaders at businesses with international digital operations have been keeping an anxious eye on new digital taxation proposals that are racing toward finalization, and rightly so. There’s a lot at stake for the prosperity of many companies and sectors. But the implications are even more far-reaching than tax leaders might have imagined. Flawed, hastily-adopted fiscal policies could distort or disrupt the global digital economy, as I argue in a recent World Finance article.

The OECD is moving forward with its own digital taxation model, which it expects to finalize next year. Some tax authorities, chafing at what they perceive as the OECD’s plodding pace, are forging ahead with their own rules. Last year, the European Union (EU) tried to establish a digital service tax (DST). France has already adopted a unilateral DST. The United Kingdom’s digital tax rule will take effect next year; Germany and some other EU members are considering similar moves.

All of these initiatives – even the OECD’s relatively slow-and-steady approach – are, in a sense, premature, because our understanding of how the global digital economy (GDE) functions is still somewhat basic. Economists are still working hard to describe how value is created through vast, intricate, interactive digital networks. Sudden shifts in tax policy could send shockwaves through a complex economic environment that’s barely a few decades old. By accelerating the pace and acting on a unilateral basis, tax authorities are hurtling toward the avenue marked Unintended Consequences. Think “trade barriers” (and all the risks those bring). Think double or even triple taxation, which certainly qualifies as a major risk in some scenarios.

I’m not saying digital taxation is unnecessary. Tax policies need to evolve alongside changing economic realities. What I am saying is that designing an effective tax model will take time and a lot of very careful thought. For now, the OECD’s relatively slow-and-steady approach may be the best we can hope for. At any rate, tax leaders at global digital enterprises should throw their weight behind a precise and prudent approach, reminding policymakers that the GDE is still in its infancy.

Word to the wise…Be careful with this baby.