- Governments use taxation as a policy instrument to create a favourable business climate in the face of competition from neighbouring countries. Tech companies appear to be bearing the brunt of the blame associated with this geopolitics of tax, even though it is actually governments who set tax law and determine the international allocation of profit.
- The prevailing public perception that tech companies pay less corporate taxes is a myth: A comparison of the global effective tax rates (ETRs) paid by some of the world’s largest internet firms worldwide shows that they pay taxes which are on average with those of leading businesses across the Asia-Pacific region. In addition, the biggest companies from Silicon Valley pay similar or even higher rates than those paid by many other internet companies in the Asia-Pacific region.
- The real question is where corporate taxes are paid. Most businesses tend to keep their key functions and production capacities in the country where they were once founded. By extension, they also tend to pay their taxes in that country. If Silicon Valley was to engage in profit shifting, they would be moving their profits in the other direction: To Asia, where the growth rates are higher and corporate tax rates are lower – not vice versa.
- Moreover, Asian tax bases are not actually shrinking, but growing, since the invention of the internet. In other words, the tax problems we are seeking to address through sometimes draconian measures do not seem to exist. Tax revenues from corporate income taxes are growing at a faster pace than GDP or personal income taxes. Total corporate taxes collected in the Asia-Pacific region have more than doubled in the last decade.
- Blaming the internet for base erosion is likely to be a misconception created by national politics, or an attempt to protect the revenues of old telecom incumbents by blocking new, innovative services that compete with basic telecom services. It is difficult to find any other plausible explanation, as the combined revenues of the leading US-based internet services in the Asia-Pacific region are roughly equivalent to (at most) 0.1% of the USD 16.1 trillion trade in goods and services with Asia-Pacific annually. If base erosion and fairness were a real problem, there would be no other obvious reason to go after the internet firms while turning a blind eye to the remaining 99.9%.
- If all countries started taxing foreign exporters as though they were local businesses, every Asian export-led economy, or any country with a trade surplus, would be at a net loss – with the United States as a net gainer. Countries like China, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore, Thailand and Vietnam were showing strong surpluses on trade in goods and services in 2016, and would lose tax revenues if the principles were reversed.
ECIPE gratefully acknowledges the support for this paper from the Asian Trade Centre. e authors also thank Nicolas Botton for his able research assistance.
Corporate taxation is always a controversial topic, and international taxation even more so. The issue of where and how much businesses actually pay in taxes has been exacerbated by globalisation and capital mobility, and in recent years, through digitalisation. But the prevailing public perception that tech companies pay less corporate taxes is a myth. In fact, they tend to pay more taxes than any other sector. The real question is where these taxes are paid.
This paper is focused on the conversation around corporate income tax in the digital age, rather than the broader issue of consumption tax relating to online transactions. The truth is that governments use corporate taxation as a policy instrument to create a favourable business climate for entrepreneurs and foreign investments in the face of competition from neighbouring countries. Moreover, it is a matter of how the tax system has been negotiated by the governments.
This geopolitics of taxation is a fact of life for many countries in Asia, especially those in the shadow of dynamic hubs like Singapore or major inner markets like China or Japan. Digitalisation plays a less prominent role in this fiscal geopolitics, as tax systems are never designed to benefit internet companies, but rather traditional manufacturers and financial institutions. Nonetheless, tech companies appear to be bearing the brunt of the blame associated with the geopolitics of tax.
However, the politics of international taxation predate the creation of the internet. While there are legitimate concerns about tax evasion (where companies abuse loopholes in unintended ways to avoid taxes), this is a very different matter from tax competition where companies make their business decisions by taking into account lawful tax policies of legitimate governments of major countries. In other words, the international tax system is working exactly the way the governments intended it to.
Also, it is widely – and incorrectly – assumed that this lawful tax competition between nations leads to base erosion, i.e. that a country’s corporate tax base shrinks due to tax competition. Rather, the data shows that this assumption is false as the tax base (and in particular the corporate tax portion of it) is in fact growing in Asia.
The principle of taxing corporations on where the assets are based (rather than where the consumption takes place) is internationally agreed. That said, the taxman would want any business – foreign or domestic – to pay all their taxes in their jurisdiction rather than elsewhere. Some tax authorities wouldn‘t mind if foreigners paid twice – at home and abroad. For example, the EU countries have advocated globally for taxing online business on a discriminatory basis, which has led to a new OECD convention that provides legal grounds for its signatories to revise existing tax treaties and arrangements on a wholesale basis. The purpose is to designate foreign online businesses as having ‘permanent establishments’ on their export markets, and subject them to double taxation at home and abroad.
Contrary to their own economic interests, some countries in the Asia-Pacific region are being misled into following suit. There is no doubt that the internet has increased the ability of businesses to engage in trade without a costly physical presence in every country. Online advertising, e-commerce and mobile apps have levelled the playing field between Asian entrepreneurs and large Western conglomerates, and closed the economic gap between developing countries and advanced economies.
A debate on future taxation must firstly be clear about what the problem is, and who and what is causing it. Some populist voices have singled out the internet as the main culprit. It is a common cliché in management literature that the internet has rewritten many rules – but the government tax code is definitely not one of them. To selectively reverse internationally agreed tax principles for just one type of service is hardly consistent with the rule of law. Moreover, it would slow down the public’s access to innovative online services, which could only benefit dominant telecom operators – some of whom pay little or almost no taxes.
 See inter alia OECD, Addressing Base Erosion and Profit Shifting, 2013
 OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, 2017
 See Lee-Makiyama, Verschelde, OECD BEPS: Reconciling Global Trade, Taxation Principles and the Digital Economy, ECIPE, 2014