Wednesday, October 31, 2018
Wei Cui (British Columbia) presents Arguments in Defense of the Digital Service Tax at Pennsylvania today as part of its Tax Law and Policy Workshop Series hosted by Michael Knoll, Chris Sanchirico, and Reed Shuldiner:
Do digital platforms, operated by multinational companies, give rise to new profit tax bases? Do they support new claims to, or new desirable international allocations of, taxing rights with respect to MNC profits? Within the last year, these questions have been forcefully raised by bold proposals advanced by the European Commission (EC) and the UK government. Reactions among both practitioners and academics to the EC and UK proposals have been predominantly negative. In this paper, I abstract from the EC and the UK’s particular policy formulations and canvas broader economic efficiency arguments that may be constructed to support a digital service tax (DST). I show that there is a variety of plausible arguments in favor of a DST: dismissive criticisms directed against it miss some of its most basic and obvious rationales. Rather than whether such a tax has any adequate justification, a topic worthier of discussion is what might be the best design of such a tax—which depends on how its expected welfare effects, including its incidence and resulting distortions, vary according to design.
In other words, there are reasons to think that the statement of Pierre Moscovici, the EU Taxation Commissioner, that “digital taxation is no longer a question of ‘if’ – this ship has sailed” is apt not only politically, but also intellectually. Overall, this article lays out three types of arguments in defense of the DST. The first is that it possesses ample motivation (which is not the same as saying that any particular version of the tax is well designed). The second is that while the optimal design of taxes that reflect user value creation is unclear, it is also unclear that the unilateral, turnover versions of the tax is inferior to the traditional treaty approach of attributing corporate profits based on the arm’s length principle (ALP). The third is that, more generally, the merits of the new tax should not be judged relative to the existing treaty framework. That framework unjustifiably limits the adoption of optimal taxes, and its focus on allocation issues through arbitrary legal devices provides poor guidance on how to improve tax design in the global digital age.