China and the US could define the digital tax debate

The US and China are home to a rapidly expanding high-tech industry. US multinationals like Google and Apple may be household names, but Chinese companies Baidu and Huawei are major players in a global market.

“It’s going to be easier to get a consensus between the US and China [on digital tax matters] than with the rest of the world,” said Jeffrey Owens, director of the Tax Centre at the Vienna Institute.

“The US and China have a common interest to protect their tech companies operating abroad,” Owens, who served as director of the OECD’s tax team, told TP Week.

Others suggest the Chinese government might look to the US as an example. “The US has been taking its own course in tax policy, and China is eager to copy the US as it continues to grow,” said the head of tax at a telecoms company.

It might seem strange that there is not more cooperation between the US and China given how close the two economies are. China owns $1 trillion of US debt and maintains low interest rates to the benefit of the American economy, while major US companies rely on Chinese labour to produce consumer goods.

Yet the US and China are locked in a trade dispute over allegedly breached agreements on intellectual property (IP) rights. However, this would still technically leave open the possibility of cooperation on tax policy.

Wei Zhuang, an international tax specialist who previously worked on TP for Chevron China, doesn’t see the trade spat holding back the two countries on digital tax.

“The digitalisation of the global economy is inevitable and the world needs a framework, or some guidance, to impose taxes efficiently, effectively and equitably,” she told TP Week. “The Chinese government will need to deliberate on these issues.”

“Digitalisation is driving our economies, driving productivity and creating jobs. So we need an international tax system to ensure that this growth can be realised ,” Owens said. “It’s not just about who gets what.”

The OECD will draft the second report over the course of the next few months. Sources close to the organisation told TP Week that the report may not have a lot of new detail, but the proposals might combine some ideas from the UK about a user-based approach to profit allocation and nexus with the US marketing intangibles approach.

There may even be special rules for specific jurisdictions. If this is the case, the real wild card is whether China and India will go along with plans drafted on the terms of the US, the UK, France and Germany. However, this is just one possibility.

One reason why some tax experts are looking to the US and China is that the EU has shown little sign of unity on the digital tax question. The European Commission is even considering moving away from unanimity voting on tax matters to a majority voting system to help push through some of the more contentious proposals.

US officials made no secret over what they thought of the EU plan for a turnover tax. It was widely seen as an ‘attack’ on US businesses. This response to the proposal led to discussions about what it might mean for US-EU trade relations.

“The US could have taken the EU to the WTO by mandating that its companies don’t have to pay the digital services tax, but this would be an extremely aggressive position to take,” the head of tax said. “But that’s not to say it couldn’t happen in today’s world.”

One head of TP at a tech company was sceptical : “Would Trump really want to defend Silicon Valley from the EU?”

“He doesn’t much like Jeff Bezos and he sees Silicon Valley as connected to Obama. So maybe not,” they added.

On the other hand, the Trump administration has proven unpredictable. US tax reform may have done more to bring the country in line with the BEPS project than any preceding efforts by American lawmakers.

What is difficult to see is whether the US and China working together would be good or bad for the OECD’s initiatives. It would be a major step-change for the Paris-based organisation . Once the BEPS plenary meeting concludes later in January, the countdown to the G20 summit in Osaka, Japan on June 28 2019 will begin.

“The OECD is trying to speed up the process and they want to get their recommendations out by the middle of 2019,” Owens said. “They can’t leave it to the politicians, who will take even more unilateral actions in the meantime.”

At the same time, Chinese and US multinationals may have to consider the common ground between them to push forward on a global solution. It’s whether or not the differences between them and the trade disputes make this a completely unpalatable option.

“Both the US and China have huge tech companies which to some extent dominate e-commerce,” Zhuang said. “However, these companies have different values, different visions and ultimately different strategies.”

“These companies may have a common interest to defend themselves against the aggressive proposals for digital tax in the EU or Australia,” she added, stressing, “but I personally think there is still a chance for the OECD to work out a framework.”