This article discusses how the ongoing Covid-19 pandemic affected global tax collections when technology firms make significant gains due to the work-from-home environment. The emergence of the digital economy has caused confusion concerning how tech companies should pay their corporate taxes. This issue has been compounded by the current pandemic with countries becoming reluctant to trade away tax revenue generated from tech companies. According to the article, profits earned by “U.S. tech giants such as Alphabet Inc.’s Google and Facebook Inc. are becoming even more tempting to European nations that are looking for money and ways to respond to their citizens’ criticism that multinationals aren’t paying their fair share.” As such, different countries are seeking to pursue unilateral taxes on digital companies.
The thriving digital economy presents a major problem in terms of structuring corporate tax. Under the conventional business environment as highlighted in the chapter studied in class, corporate taxes are structured based on the existing laws in different countries. For instance, in the US, corporate taxes are not strictly increasing as instituted by the Tax Reform Act of 1986 and expanded in the 1993 Omnibus Budget Reconciliation Act. As such, the US has six corporate tax rates – 15%, 25%, 34 %, 35%, 38%, and 39%, even though the last two arise from surcharges applied on top of 34% and 35% rates. These laws make it easy to structure corporate tax laws.
However, with the digital economy, there lack clear laws on how and where tech companies should book taxable income. In most cases, these companies profit from citizens in one country and book taxable income elsewhere. According to the article, this scenario happens “because profits are taxed where value is created, not where customers are located.” With the digital economy, location does not matter, and thus tech corporations could easily manipulate rules to pay minimal taxes. The Global Tax Project of 2013 seeks to address these issues to avoid a patchwork of national taxes by creating stability in the location and type of taxes that tech companies should pay.
Reference
Rubin, R., & Hannon, P. (2020). Global tax talks waver as pandemic hits government coffers. The Wall Street Journal. Web.