This appeared in CNBC-TV18 on the 1st of August

Last week the United States President, Donald Trump, had other meltdown on twitter. This time it was directed against the French. The French Parliament had approved a Digital Services Tax of 3% on revenues deemed to have been earned in France. It was aimed at ensuring digital giants like Facebook and Google, who pay little or no tax, are made to pay.

Mr Trump used the tool of his diplomatic overtures in communicating his displeasure – Twitter. He tweeted “France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home Country, the USA. We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine!’. Never mind the fact that Mr Trump has been railing at big tech companies and their non payment of taxes anywhere, the French action was enough to send him into a tizzy and threaten duties on French wine.

With the advent of the digital economy, digital giants have emerged. Amazon, Google, Facebook, straddle the world. Users have taken to these platforms like ducks to water and are interacting and transacting online more than ever before. However, the sorepoint is not the growth of the digital economy, nor is it the profits being made by these companies. The problem is that they seem to pay very little tax in the economies in which they operate, or indeed anywhere. In the United States, Amazon paid $0 in taxes in 2018 – it’s profits were $11 billion. The Indian exchequer saw Facebook and Google make over $10,000 crore, from which the exchequer earned $200 crores as taxation.

How does this work? A digital MNC can offer its platform to Indian audiences who log on, put up content and interact. The MNC’s advertising subsidiary based in Cayman Islands (a low tax country) will sell the audience (270 million strong) to advertisers. The revenues accrue in Cayman Islands, tax is paid there. And the Indian exchequer gets nothing. Since no product is created, the rules of transfer pricing do not apply.
A taxation system put in place for manufacturing industries, and the trade in products seems unable to cope with digital transnational corporations whose services are delivered from anywhere. The international taxation system is based on a simple principle – multinational corporations (MNC’s) would be taxed in the country where it creates value. Which works perfectly well when you deal with a car manufacturer who produces different parts of the car in different countries, but it breaks down when it comes to dealing with digital giants that make nothing, and use the ‘content’ created by those who use its platforms to make profits. How do you tax an intermediary who does offers their very valuable service for free, and pays for this service by selling personal data of its users as packages to advertisers? At the core is nations demanding a chunk of taxes for value created on these platforms by their citizens, who use and consume it.

And, this is the question that has been bothering policy makers across the world. Most of these policies revolve around taxing advertising income. India currently taxes advertising revenue earned by companies like Google and Facebook, at 6%. The G20 is looking at ways of taxing these giants. Dubbed the “GAFA” tax – Google, Apple, Facebook, and Amazon Tax- nations are looking at how to charge these giants tax on revenues. India too is mulling such taxes.

There is a problem when corporations don’t pay tax anywhere. While creative accounting and manipulating existing systems to avoid tax may be great for shareholders – Jeff Bezos is among the richest people in the world – it has a grave impact on the social welfare of nations that they are based in. When you and I can pay tax, when start ups and small businesses can pay tax – there is no reason why loopholes exist that allow companies like Google, Facebook and Amazon to get away with paying nothing.