Written by Giulia Lombardo

Introduction

In recent years, the development of technology has created the digital economy, which is rapidly gaining importance. Companies choose more and more digital solutions which, for what concerns taxation, come into contrast with the services offered in presence. In fact, the taxation burden on traditional economy.

In order to create a fair competition environment, political and economic authorities have been discussing the introduction of a digital tax for several years. Particularly, in an interconnected world, the discussion taking place within the framework of the European Union and the United States has a potential impact on both the consumer and the companies of the two areas. Digital taxation affects all those who not only own a digital service but also use it. Digital business goes beyond physical boundaries, and, for this reason, it is very important to know the dynamics that move the services of the digital economy.

The Digital Economy

The digital economy includes all the economic activities that have developed thanks to digital technologies, whose phenomenon of diffusion is called digitalization. The benefits deriving from it are:

• the cancellation of the limit of the physical distance
• the increase in mobility and in network effects
• the ability to benefit from specific data to meet the individual needs of consumers

Thanks to this new type of economy, new jobs have been created and opportunities for innovation have been expanded with more detailed services, allowing the expansion of the markets themselves. To date, 9 of the world's 20 largest companies are digital.

More and more companies are choosing digital solutions that allow them not to need physical headquarters abroad. Since according to tax laws an entrepreneur pays taxes in the country where his business was created and also in those in which his business operates, those who opt for digital business or eCommerce pay taxes only in the country where the activity was registered. This means that this part of the fast-growing economy is excluded from the tax burdens that become much heavier and that weigh on physical companies. Consequently, the tax authorities, by taxing the profit of the activity on their territory, collect taxes from these entrepreneurs who have offices located in different countries. The entrepreneurs must raise prices to support the costs, becoming evidently even less competitive than the digital companies.

This condition has opened an important debate on the need to revise tax rules in order to restore a level playing field between entrepreneurs regardless of the type of activity, physical or virtual.

The International Tax System

The international tax system is not keeping up with technology, since the taxation system was created at a historical stage when companies and businesses worked only in a workplace and sold physical traceable products. As technology progresses, products and services begin to be offered by technological companies. The companies of greatest value in the world are Microsoft, Amazon, Alphabet, Apple, and Facebook. The call to modernize the tax system also comes from institutions such as the International Monetary Fund, the European Commission, and the Organization for Economic Co-operation and Development. These organizations state that tax rules need to be revised to create a level playing field.

The criticism also comes from individual states that have mobilized to end this situation of imbalance. France in 2018 approved a 3% digital tax on Big Tech companies such as Facebook, Amazon, and Google. It provides for it to be applied to companies with turnover of at least 840 million dollars, of which 28 million are made in France. The French digital tax is addressed to two sectors. The first concerns digital marketplaces that connect customers to companies, the second is online advertising that identifies the target customer on the basis of personal data. One problem that can arise from a digital tax defined by each state is that the giants of technological companies would pay only a small percentage of these taxes that, inevitably, would harm small and medium-sized enterprises and their consumers.

The American Position during Trump Administration

As regards the taxation applied by governments to non-national companies, some figures in the political world have shown aversion. One of them is Donald Trump, President of the United States from January 20, 2017, to January 20, 2021. He performed a survey on the French digital tax, stating that France's choice targeted U.S. technological companies, which could only be taxed by the U.S. government itself.

The meeting between the President of the United States and the French President Emmanuel Macron led to the search for a compromise and a shared solution that would put aside Washington's threat to impose trade tariffs on certain French goods. In addition, the French authorities added that an international agreement reached within the framework of the OECD would immediately replace the French digital tax.

The strong opposition of the President of the United States to the French digital tax is attributable to the fact that the big companies - as already mentioned above - are above all American and therefore, according to Donald Trump, the introduction of a digital tax would be aimed at impeding American multinationals. The French request to work within the framework of the OECD has disturbed the American authorities as it could support European companies and subordinate the American ones.

For this reason, the United States had invited the European authorities to postpone the creation of the project on the digital tax because it could have obscured a possible work developed on the international level. Nevertheless, the negotiations carried out within the OECD involved about 140 countries with the aim of creating a preliminary agreement on the Global tax that would align the digital taxation system, in anticipation of the G20 meeting (occurred on 9 July 2021).

Awaiting for an agreement to be reached within the OECD, other countries such as Spain, Germany, and Italy have also searched for a national solution. Italy on January 1, 2020, applied the tax on digital services on which, on January 6, 2021, the Office of the United States Trade Representative made a report. The Italian Web Tax has been defined as "discriminatory and unreasonable", because of the services and revenues set for applicability of the tax and because of its extraterritoriality.

The OECD Position and the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy

In July 2021, the OECD confronted the issues arising from the taxation of the digital economy. In particular, the Organization elaborated the Two-Pillar Solution in the Tax Report to G20 Finance Ministers and Central Bank Governors. The strategy focuses "(Pillar One) on multinational groups with a global turnover of more than 20 billion euros and a profitability of more than 10% and (Pillar Two) on groups with a global turnover of more than 750 million euros".

The goal pursued by this system is to ensure that multinationals pay taxes fairly and everywhere and to improve the system by making it more homogeneous. Especially:

• "the first Pillar aims to ensure a fairer distribution of profits and tax rights related to the largest multinationals among the countries [...] and aims at the preparation of a new tax model no longer based solely on the criterion of the physical presence of the company. A share of the profits will be taxed in the place where they are actually made, that is, where the final consumers are located (market jurisdiction);
• the second Pillar aims to limit tax competition through the introduction of a global minimum corporate tax [...] for which the participant States have accepted the application, in the taxation of large companies, of a minimum tax rate bracket of 15% [...] which will generate additional tax revenue of about 150 billion dollars per year. Further benefits will come from the stabilization of the international tax system and from greater tax certainty for taxpayers and tax administrations."

The American Position during Biden Administration

With the end of Trump's term and the beginning of the mandate of Joe Biden, who took office in the White House on January 20, 2021, the American position has changed. On February 26, during the meeting of G20 finance ministers, US Treasury Secretary Janet Yellen declared that the government would not apply the so-called Safe Harbour Clause. Conceived by the Trump Administration, it established that American companies would choose whether to join the global fiscal mechanism. Hence, the American openness would have made it possible to define a tax to which American companies would have to comply.

Yellen's position was also supported by Big Tech themselves. This is confirmed by the statement of Heather Greenfield - head of communications of the Computer & Communications Industry Association, a lobby representing Google and Facebook - who showed an optimistic position regarding a possible consensus on tax reform. With the new presidency, therefore, the prospect of a multilateral international agreement becomes more and more concrete.

The Position of the European Union and the Role of the European Commission on Digital Taxation

The European Union, in recent years, has shown that it has understood the importance and the role played by the digital economy. The European Commission, in fact, has set itself the goal of creating a digital single market. In the relevant Strategy, it is defined as "a market in which the free movement of goods, persons, services, and capital is guaranteed and in which, whatever is their nationality or place of residence, individuals and companies do not encounter obstacles to accessing and carrying out online activities under conditions of fair competition". The progression towards a less and less traditional economy is highlighted by the Digital Economy and Society Index or DESI, created by the European Commission in order to define, on the basis of some indicators, the European performance and the competitiveness of individual Member States in the digital field. Each state moves in a different way and with a greater or lesser extent evolution.

DESI is defined by some key indicators:

• human capital
• connectivity
• integration of digital technology
• digital public services

Given the importance of the digital economy, the tax issue is also a challenge and a goal of the European Commission. In fact, since many companies benefit from public services without paying their fair share of taxes and the European Union's single market is subordinated to an equal footing, the European Commission wants to create a fair taxation plan. This is also necessary because of the risk of illicit practices that do not comply with international standards. The demand for a neutral, fair, and transparent system of taxation has encountered the proposals of the European Union since 2015.

In outlining its Digital Single Market strategy, the Commission has announced that it wants to renew the taxation system by making it fairer, on the one hand also including the profits of the digital economy and on the other by lightening the burdens and obstacles in cross-border sales. "The role played by the European Commission in this area is reconstructed in terms of free competition and consists in ensuring that Member States do not grant selected companies more favorable tax treatment than others". In fact, it has also mobilized to condemn the States that had favored complex companies. An example is the case of Ireland, which suffered a sentence for granting Apple illegal tax benefits - for a value of around 13 billion euros - for which, Apple had not seen any taxation applied to its profits.

Despite individual proceedings and convictions, several multinationals have continued not to pay taxes even in the countries where they operate. Apple, in January 2021, registered its most profitable trimester (sales for a value of 100 billion dollars) and as a result, Ireland also enriched itself. Irish Gross National Product "grew by +3% despite the lockdown and the collapse of the income of its citizens" due to the "export of multinational companies specialized in medical equipment, pharmaceuticals, and IT services [...] that have chosen Dublin as their tax office".

Conclusion

The adoption of a digital tax is fundamental in order to create equal competition between all types of companies, regardless of whether the service is offered physically or online. Creating a Global Tax helps to standardize the system and avoid inconsistencies or difficulties for entrepreneurs to start and for consumers to enjoy a service. In addition, the same tax must consider the different situations and the different dimensions of companies because small and medium-sized enterprises cannot be burdened as much as multinationals and Big Tech.

Reaching an international compromise will not be easy as national and regional interests are involved. The American intention to take part in the Global Tax project is fundamental since many of the major Big Tech have been created in the United States. Not secondary is the role of organizations, including the European Union, which can represent the suitable terrain for a shared project but, equally, it can constitute a context of conflict of interests.

Bibliography

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