Why the U.S. Can’t Avoid the Digital Tax Debate

Global digital taxation is coming. What it will look like depends, in part, on what the U.S. chooses to do – or not do.

U.S. Treasury Secretary Steven Mnuchin has been outspoken in his opposition to tax proposals who single out digital companies and in his support for international cooperation to address the tax challenges of the modern economy. Yet the U.S. often prefers to forge its own path, as a new International Tax Review article points out. For example, while the U.S. has embraced some of the OECD’s BEPS measures, it has yet to integrate some aspects that conflict with either its model tax treaty or other provisions in its tax code. Such decisions raise the question of “how involved the U.S. truly wants to be on the digital tax debate, the conclusions of which will seriously affect some of its biggest corporations,” author Anjana Haines points out.

The article includes comments from Vertex Chief Tax Officer Michael Bernard (and me) on the implications of the United States’ position. The danger is that unilateral action by individual countries will preempt the kind of broad, methodical approach that Mnuchin is calling for. As Michael notes, “It’s in the U.S.’s best interest that if there is going to be multilateral action on taxing the digital economy and not just unilateral action, then they [the U.S.] really need to get in there and modify their position to work with the OECD to come up with a workable solution.”

Taxing the digital economy is challenging, I point out in the article, because the sector is still in its innovative infancy and “growing at an exponential rate relative to other parts of the economy, in particular the traditional trade-based economy of the past.” But that hasn’t stopped a growing number of countries from proposing unilateral action. The United Kingdom, for example, recently announced it will introduce a tax targeting the largest internet businesses, according to a Bloomberg report. The tax, slated for 2020, is described as a temporary measure. But, as I note in the piece, temporary taxes have a very strong habit of turning into permanent ones.

The emerging digital taxation era will continue to be shaped by the conflicting forces of “interim” proposals and unilateral actions on the one hand, and broad global initiatives on the other. In the meantime, businesses are left wondering what the final outcome of that dynamic will be.