Taxing the digital economy?
“The internet is just a fad” is a famous Swedish quote by a former social democratic minister in the mid-90’s (even though it is commonly said that she was mis-quoted). Now, over 20 years later, it is evident that the internet was not just a passing trend, but the start of a digital revolution that currently is transforming our whole society.
Today half of the world’s population is connected to the internet. The numbers are even higher in the Nordics, which consequently ranks in the absolute top of digitalized countries globally. Out of the Nordic countries, Sweden makes the OECD list of top 10 exporters of ICT services (2016) with 3% share of the total global export market (OECD Digital Economy Outlook 2017).
Globally, 9 out of the 20 of the largest companies in the world are today digital, compared to 1 out of 20 ten years ago (EU Commission Fact Sheet on Digital Tax Reform). The digital economy is growing, also in the finance sector. FinTech’s for example does not only apply to small startups, but also large, well-established companies with hundreds and thousands of employees. The current tax system has however not been able to keep up with the changing economy, posing a challenge to the Nordic welfare states.
The Nordic model of strong and universal cradle-to-grave kind of social protection is built on high public spending, primarily financed through taxes. In turn, contemporary tax regimes today are based on taxing labour rather than productivity and taxing revenues where the HQ is located rather than profits created in the digital economy.
This means that if the status-quo on the labour market changes, which is a potential effect of an increasing digitized sectors and growing use of AI, tax revenues are at risk of dropping dramatically. An increasingly digital market also blurs national borders, making the local market global and the global market local. For the Nordic countries, all with high living costs and highly educated citizens, this means that local companies might consider relocating their workforce to a low-wage country instead. The implications are once again a decrease in taxable labour, making it difficult to finance the welfare system.
Picture source: EU Commission
Another aspect to consider in this scenario is the challenge to provide a level playing field and for traditional and digital companies, ensuring fair competition. Traditionally companies are taxed where they have physical products and services. Tax is therefore calculated by wherever a firm’s head office is located. But the digital companies are mobile and create value and revenue in a multitude of locations simultaneously, paying much lower taxes to the effect.
The legislators are trying to keep up. In March, the EU Commission put forward a proposal to reform corporate tax rules and introduce an interim tax on certain digital services that today escape tax completely (such as services connected to data, online platforms and streaming services) (EU Commission, Fair Taxation of the Digital Economy).
The proposal has been met with mixed reactions. France, Italy, Spain and Poland are among the supporters of the proposal. The US calls these taxation amendments anti-American, as they are very likely to effect US companies such as Apple, Google and Facebook. Sweden and Finland, true to the Nordic mentality, remains carefully skeptical, while Denmark are advocating against together with countries like Ireland, the Netherlands and Greece. It should be remembered that EU Member states all have veto-right when it comes to taxation issues.
The Commission is not completely satisfied themselves. According to a quote from Valdis Dombrovskis, Vice-President of the EU Commission, this proposal is the second-best thing. What they really want is a global solution, for example initiated by the OECD, but they feel that the time is running out (EU Commission Fact Sheet on Digital Tax Reform). The proposal has now been passed on to the Council of the EU for negotiations. Several EU countries that previously supported the idea of a digital tax are now starting to re-consider as the concrete proposal has been presented (Politico, Europe’s digital tax map), so it remains to be seen if the Council will pass the proposal in the end.