The OECD's Big Tech Cash Grab
Nearly 140 countries around the world, led by the OECD, are rewriting rules that would tax high-tech and other multinational companies (WSJ, “Global Companies Are Caught Between New Taxes and a Trade War,” Oct. 13, 2020). The proposed rules would effectively transfer tax rights between countries, including allocating shares of taxable profits, determining which country should have tax authority, and a minimum tax rate. The current proposal is little more than an opportunistic scheme designed to increase the tax coffers for many nations at the expense of the U.S.
Initially, countries seemed mostly concerned about the erosion of their traditional tax base by digital markets having a minimal physical presence. While the digitalization challenges remain a focus, the international initiative appears to have expanded to include rewriting tax rules affecting all large multinational companies in the hopes of reining in arbitrage, stopping companies from shopping favorable tax venues, and establishing a minimum tax rate across countries. Government spending during the COVID pandemic coupled with economic shutdowns have only added to the urgency of these actions.
Both the initiative to set a global minimum tax rate (referred to as Pillar Two) and the initiative to address digital taxation (Pillar One) appear to pose significant costs to U.S. companies and potentially consumers.
Is venue shopping a bad thing? Imagine you are going to buy a pair of sneakers from a store for $100, but the store says it will cost $120 after adding hefty convenience fees. When you check the shoe store across the street, you find that the same $100 pair for only $105 after the fees. Comparison shopping saves money, rewards market winners, and disciplines price gougers. Venue shopping is good.
Now, what happens if all shoe stores to set the same surcharge? That is what the OECD’s Pillar Two proposal does by setting a minimum tax. It discourages competition between countries by coordination, collusion, and price fixing. It would undermine our ability to attract capital investment, lure manufacturing back into the U.S., and retain our tax base.
Given that some governments own, subsidize, and incentivize their domestic commerce, and that wages vary between countries, a minimum tax hampers the ability of countries to overcome these discrepancies, attract businesses and compete. The Pillar Two tax proposal is not about tax fairness or preventing arbitrage; it is about finding new tax revenue sources, creating an international taxing authority, and codifying rules make low taxer countries net losers.
As far as Pillar One, the U.S. has long been a global high-tech leader, which makes the tax plan’s reallocation of profits all about targeting U.S. high tech firms. This could backfire, as was the case when the U.K. recently imposed its web tax on Google. Google simply increased the prices it charges its UK advertisers, which served to push these costs to U.K. businesses and ultimately its consumers.
More likely, however, increasing taxes on U.S. high-tech firms would repress demand, which could spawn high-tech firms to develop in other countries while diminishing America’s high-tech position. That outcome would distort international competitiveness and act similar to a trade tariff. This would eventually lead to a balkanization of high-tech businesses, as firms look to minimize their tax exposure across borders. Whatever the ultimate outcome, the U.S. would become a major loser from the Pillar One tax plan – both financially and as a technology leader.
In considering what is exempt from taxes or not, the latest OECD proposal seems arbitrary. For example, an internet service that connects its customers across borders to a social media site is exempt from taxes, but a “free” social media service at one end of the connection is not exempt. The rules take on a Luddite anti-technology approach: an online intermediary that books hotel rooms is taxed, but a similar service provided directly by the hotel is exempt. The proposal seems slanted against using automation to achieve economies of scale where social media and search engines are taxed, while customized online and professional services are not. The added complexity will include a host of exclusions and carveouts.
The motives behind the push for a tax plan appear to have little to do with helping consumers and businesses. At the OECD presentation on October 12th, the Secretary General Angel Gurria explained that large tech firms would be a “good source” of tax revenue because big tech was not as hurt by the COVID pandemic as other businesses were. How convenient.
The Federal Trade Commission defines price fixing as an agreement among competitors that raises, lowers, or stabilizes prices or competitive terms. In this case, the competitors are the hundred plus countries trying to wrest tax dollars from the U.S. and a host of lower tax countries. The result will be a reduction in international competition and the development of a taxing cartel.
The U.S. should not be part of this anticompetitive scheme. If these tax plans become operational, American sovereignty will be weakened and taxing power ceded to international bodies. Unable to shop around, consumers will be the ultimate losers.
Steve Pociask is president and CEO of the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.