Lilian Faulhaber (Georgetown) presents Is Digital Different?: Economic Nexus and Other Efforts to Respond to the Changing International Tax Landscape at Pennsylvania today as part of its Tax Law and Policy Workshop Series hosted by Michael Knoll, Chris Sanchirico, and Reed Shuldiner:
In October of 2018, lawmakers in the United States issued a series of press releases that focused on certain new developments in the international tax world. Treasury Secretary Mnuchin argued that these developments were “unilateral and unfair” and stated that they were “singl[ing] out a specific industry for taxation under a different standard.” Democrats and Republicans on the Senate Finance Committee stated that the developments were “designed to discriminate against U.S. companies and undermine the international tax treaty system.” And House Ways and Means Committee Chairman Kevin Brady charged that one of these developments was “inconsistent with international norms” and a “blatant revenue grab.”
The developments that inspired such ire were tax measures proposed by the European Union and the United Kingdom to target the so-called “digital economy.” These measures are part of a much larger trend that has been developing over the past several decades as countries around the world have grappled with what they see as a changing economy. As technology has allowed companies to provide goods and services without any physical presence in the jurisdiction and as companies have developed progressively more valuable patents, software, and other intellectual property, countries have attempted to update their tax systems to reflect these changes. They have done this in a variety of ways, ranging from multilateral projects to reform the tax system to unilateral rules targeting so-called digital companies to antitrust enforcement efforts to unilateral and multilateral rules redefining traditional tax concepts.
This Article shows that all of these efforts, whether they are presented this way or not, are essentially targeting what the OECD, the European Union, and others have labeled the “digital economy.” And it highlights that, although countries such as the United States may suggest that they are merely the targets of these efforts, they are also entering this field with their own efforts to control the digital economy.
As I have written in previous work, many international tax developments, whether unilateral or multilateral, are essentially efforts to shift the playing field in the direction of the party passing the developments. This is true of rules that are presented as limiting tax competition or tax avoidance in that even these rules are meant to favor the jurisdictions that implement them. This Article argues that the recent efforts to target the digital economy are also part of the tax competition story in that these rules are ways for jurisdictions to compete with other jurisdictions over tax revenue, as were previous tax competition provisions. But, unlike previous rounds of tax competition, these rules are no longer just about attracting taxpayers or revenue to the jurisdiction. Instead, these rules accept that taxpayers have made the choice of where to locate their activities and income, and they impose taxation even without trying to attract taxpayers or revenue. They represent, therefore, a more aggressive form of tax competition than many of the measures that preceded them.
But this is not the whole story. Although critics are correct that these efforts to tax the digital economy are inconsistent with the existing international tax system, those same critics generally ignore that the existing international tax system is itself designed to shift the playing field toward certain countries. These recent developments that target the digital economy are therefore themselves re-adjusting a playing field that was already shifted. And, although these new developments represent a shift from previous forms of tax competition (including the antitax-competition measures that have been implemented over the past two decades), they can in many ways be seen as a logical successor to existing forms of tax competition. Over the past few decades, tax competition has shifted more and more to geographically mobile income – in other words, income that can be moved easily from jurisdiction to jurisdiction. This income generally arises from financial services and intellectual property, and, in our current economy, increasing amounts of geographically mobile income have been generated from IP and now from digital services. Efforts to target the digital economy are therefore in many ways similar to earlier efforts to target the geographically mobile economy.
So are these digital measures unprecedented and unjustified, as U.S. lawmakers and companies have argued? This Article argues that, while they may be unprecedented in their form, they are not necessarily unjustified. Instead, they may be the only way for the countries that currently benefit from the international tax system to be convinced to change it. While many of the criticisms of digital measures state that the only correct way to address the concerns that jurisdictions have with the current international tax system is to do so through an international process, such a process would require agreement by all jurisdictions, including those that benefit from the status quo. Since previous international efforts have not been able to overcome opposition by the countries benefiting from the status quo, unilateral or unprecedented measures may be the only way to reform the international tax system, and many of the jurisdictions proposing these measures have designed them not to be long-term solutions but rather short-term incentives to push other jurisdictions into international cooperation.