Will China implement a digital services tax?
With the increase in public spending during the COVID-19 pandemic, cash-strapped governments around the world are looking for ways to increase their tax revenues, for example by applying taxes on online services or finding means to fairly tax the largest companies doing business in their respective jurisdictions.
By far, at least 23 countries across Europe, Asia, Oceania and Africa have sought to implement a digital services tax (DST). Their main argument is that the international tax rules in force apply to an outdated economic model.
Along with these countries, China also faces tough decisions about taxing tech companies. However, for China, taxing the digital economy could present a much different picture than the rest of the world. Despite being the world’s second-largest digital economy, China is semi-isolated from the global digital world by a firewall. In fact, the country is more inclined to tax its burgeoning domestic tech conglomerates.
Why are countries starting to tax their digital economy?
According to the World Bank, the global digital economy is now equivalent to 15.5% of global GDP, growing two and a half times faster than global GDP over the past 15 years. The rapid expansion of digital economies has sparked debates over whether current tax rules are still appropriate in the modern global economy.
Large multinational technology companies (MNCs) have made huge profits by providing digital services across the globe. Under existing international tax treaties, they do not have to pay corporate tax in a given country if they have not made their physical presence there.
By locating the regional headquarters in low-tax countries, the world’s largest digital service providers, primarily US companies like Google, Apple, Facebook and Amazon (“GAFA”), bypass taxes in consumer countries as well. to pay little or no tax in their country of origin. This has sparked anger in the UK and the EU over concerns about base erosion and profit shifting in the modern digital world.
In March 2018, the European Commission, the EU’s executive body, launched a proposal for a digital services tax. Although the proposal was subsequently rejected at EU level, some countries have chosen to implement unilateral measures on the implementation of daylight saving time.
In July 2019, the French Senate adopted the bill and became the first country to implement a DST. Other countries quickly followed suit. According to the Tax Foundation, since March 2021, Austria, France, Hungary, Italy, Poland, Spain, Turkey and the United Kingdom have implemented a DST. Belgium, the Czech Republic and Slovakia have published proposals to adopt a DST, and Latvia, Norway and Slovenia have officially announced or expressed their intention to implement such a tax. Outside of Europe, India and Kenya have also implemented DST, while Australia, Singapore, Malaysia and Indonesia have changed their current tax rules. (While the United States frowns on the digital tax, which it says unfairly targets American businesses, it wants to pass changes to international rules that will impose a minimum corporate tax.)
However, since most of the tech giants are American companies, the Office of the United States Trade Representative has called the digital services tax discriminatory. Under the previous president, the United States decided to impose tariffs on US $ 1.3 billion of annual French imports, including cosmetics and handbags. But this was suspended after negotiations.
The US government has also proposed to impose additional tariffs on six other countries – Austria, India, Italy, Spain, Turkey and the United Kingdom. The imposition of these retaliatory tariffs has been temporarily suspended as countries seek consensus on changes to international taxation rules, which the United States has agreed to prioritize.
China’s dilemma: optimize the current system or adopt a new daylight saving time?
For other countries, the goal of implementing a DST is to tax multinational companies fairly, based on their market profits, and to fight international tax evasion. But China usually doesn’t have this problem. The main problem facing Chinese policymakers right now is taxing its domestic tech companies and monopolizing the industries of the future.
China’s digital economy currently accounts for a third of its GDP. According to the estimate of the Chinese Academy of Information and Communication Technologies, in 2019, China’s digital economy reached 5.5 trillion dollars, accounting for 36% of its GDP, making it the the world’s second-largest digital economy.
The COVID-19 epidemic has further boosted this digital economy. According to the National Bureau of Statistics, from January to November 2020, China’s total retail sales fell 4.8% year-on-year, but online retail sales increased 11.5% year-on-year.
Considering the rapid and large-scale growth rate of China’s digital economy, how to tax it is a big concern for the government, but it is not straightforward. It involves tax fairness between the real economy and the digital economy, as well as a fair sharing of the ownership and value of user data between the public and internet platforms.
Master the national tech titans and tax data
As in many parts of the world, a few tech titans increasingly dominate the daily lives of Chinese consumers, from online shopping and mobile payments to food delivery and car calls. Having noticed this, in recent months, China has revised its antitrust law and cracked down on anti-competitive behavior by tech companies. Since December 2020, regulators have fined dozens of companies, including Alibaba, Tencent, and Baidu.
Ultimately, Chinese authorities recognize the need to tax the e-commerce and tech titans who enjoy lucrative access to a large database and huge consumer traffic, like Alibaba, Tencent, Meituan and Didi Chuxing.
Tech companies like Alibaba and Tencent collect large amounts of user data while providing their services. Some government officials believe there is a need to clarify data ownership and rights.
Yao Qian, head of the Scientific and Technological Supervision Bureau of the China Securities Regulatory Commission (CSRC), believes that “user data is like a mine of precious minerals. China should consider levying a digital tax on technology companies to allow citizen-users to share the income generated by their information, ”Yao said.
Guo Shuqing, head of the China Banking and Insurance Regulatory Commission (BIRC), said there was a need to clarify data rights because it saw data as an economic contributor like labor and capital. “Big tech has de facto control over data… There is a need to quickly clarify the data rights of different parties and improve the data flow and pricing mechanism,” Guo said.
However, China’s study of implementing a digital services tax is still in its infancy. Debates continue as to whether data is taxable, where data is held, how data will be billed, and how personal data and privacy will be protected.
In addition, Wang Yongjun, professor at Central University of Finance and Economics, pointed out another interesting issue: Base erosion and profit shifting might exist not only between different countries but also between different regions. In China, taxes on digital economy operations are paid mainly in developed regions, such as Beijing, Shanghai, Shenzhen and Hangzhou, while underdeveloped regions are at a disadvantage to collect these taxes, exacerbating imbalances between countries. regions, Wang said in an interview with Caixin. .
At present, China is considering various approaches to address these issues – to optimize the existing tax system by clarifying taxes related to the digital economy or to introduce a new DST. Alternatively, the country could adopt both approaches simultaneously.
Will China levy a DST on foreign tech giants?
As the DST hour has received increasing attention on the international agenda, China is also planning to take a more active role in formulating uniform tax rules for digital businesses.
In October 2020, Qiushi, the main official theory journal of the Communist Party of China (CPC), published an article written by Chinese President Xi Jinping, which called on China to actively participate in the development of international standards for digital currency and taxes on digital services.
Yet China has no concrete plans and seems cautious about implementing a DST for foreign tech giants, especially US companies.
Zhou Xiaochuan, former governor of China’s central bank, warned the country must avoid the potential of a “new tariff war.” Given the dispute over digital taxes between the United States and Europe and the prolonged trade war between the United States and China, China does not appear willing to escalate disputes with the United States.
“A new tariff war would not be good for the globalization advocated by China, for multilateralism and for the rules-based international order, and if it does occur, it is likely that most countries will react with protectionism. This is why we have to study [the digital taxation issue]”Zhou said.
The Group of 20 (G20), one of the world’s leading organizations for global tax reform, will meet in July and hope to reach consensus on the issue of digital taxation. China, as one of the member countries, will be involved in the negotiations.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors in China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the company for assistance in China at [email protected].
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our commercial research facilities along the Belt and Road Initiative. We also have partner companies that assist foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.