The history of international taxation shows that tax tends to shift substantially after a major world event. The two world wars have been the most important catalysts for the development of international taxation, a recent report by Graphene Economics on cross-border tax notes.
In the report Keith Engel, CEO of the South African Institute of Tax Professionals (Sait), says that given the impact of Covid-19 on world economies, there is likely to be another shift in international taxation over the coming months and years.
“If we look back at the 2008 global financial crisis, it was only in 2013 that the OECD [Organisation for Economic Cooperation and Development] started formally working to address the significant issues of Beps [base erosion and profit shifting], so there was quite a lag. What is perhaps different now is that the OECD was already working on various policies prior to 2020,” says Engel.
He anticipates greater indebtedness by governments, with revenue authorities having to look for new “pockets” they can tax and potentially adopting more protectionist mentalities.
The report refers to the disruption of global supply chains and an increased focus on digital services taxes.
Globally, many countries have begun to look at localising supply chains and the OECD has had a keen eye on taxing the digital economy.
Bonface Fundafunda, an independent consultant in health planning and policy, says this localisation of supply chains is a form of protectionism that will in turn affect tariffs, as well as value-added tax and general sales tax as policy around “rules of origin” adapt.
The report also quotes Mzukisi Qobo, member of the Presidential Economic Advisory Council and head of the Wits School of Governance, as saying that the rationale behind these policy shifts (towards protectionism) will be explained as helping to build local supply chains and industries.
He says governments may argue for “infant industry protection” such as the manufacturing of personal protective equipment (PPE) and medical supplies.
“I think governments need to think more strategically and carefully about the kind of industries they want to promote as new sources of growth, such as your green industry, and digital industry infrastructure linking to socio-economic development,” he says.
“They need to overlay this with tax and other incentives to promote growth, because relying on the old sectors is not going to help economies recover from the ravages of Covid-19,” says Qobo.
The report notes that digitisation has been a “buzzword” for some time now. The pandemic has simply accelerated it. The report shows a comparison done by YCharts to show the explosion of Zoom’s daily meeting participants from around 10 million in December 2019 to 300 million in April this year.
Its market capitalisation of $48.8 billion is bigger than the combined market cap of $46.2 billion of the largest seven airlines globally (Southwest, Delta, United, IAG, Lufthansa, American Airlines and Air France KLM group).
The OECD has been focusing on ways to tax the digital economy for the past few years already. It has been considering the implementation of an additional taxing right on companies with a digital footprint in other countries.
The OECD has tried to limit the proliferation of unilateral measures by looking for a unified approach. However, certain countries such as France have gone ahead with the introduction of a digital services tax, while others have taken a wait-and-see approach.
Graphene Economics expects that this tax will be a “hot topic” among tax policy leaders and politicians. The taxing rights over technology-related income streams will certainly have an impact on international trade deals, it says.
The African Tax Administration Forum (Ataf) has already published a paper on the suggested approach to drafting digital services tax legislation for African countries.
The paper provides a draft legislation template for the introduction of a digital services tax, with a suggested rate of between 1% and 3%.
The revenue on which this tax can be levied includes income arising from online advertising services, data services, and revenue derived from users in the taxing country on the provision of online marketplace or intermediation platform services.
Duane Newman, MD at Cova Advisory and chair of Sait incentive working committee, says in the long term the priority for governments will be to stimulate economies. In the short term, pro-growth interventions such as tax incentives will be introduced.
“A lot of countries will be looking to make their policies more pro-growth, but also more inclusive … ”
He warns that this disparity may result in emerging economies increasing protectionist measures, including customs duties.
He notes that developed countries collect 1% of their total tax collection from trade, while developing countries collect on average 10% of their total revenue collections from trade.