- 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.
2. Online services pay taxes on average equal to traditional industries
The use of the internet has allowed more firms to export their products and innovative business ideas to succeed outside of their own home market. Online advertising and platforms like eBay and Alibaba have allowed even small family businesses to find customers overseas without establishing sales offices there; in the same fashion, digitalisation has allowed Indian outsourcing businesses to flourish.
However, the use of the internet itself has not provided any new conduits for multinationals and exporters to minimise their tax burden. The most common means of shifting profits (and thereby also where taxation occurs) involves trading goods and services at fictive prices between subsidiaries. For example, European luxury goods are sold at a fraction of their retail value to their own subsidiaries in Asia, thereby minimising customs duties paid at the border, and taxes can be paid in Asia where taxes are typically lower. Conversely, profits generated in Asia can be moved through ‘licensing fees’ that eradicate the profits in Asia, and through shifting the profits to some EU jurisdictions where revenue from intellectual property is exempt from taxation. Evidently, profit shifting is a practice that predates the digital economy, which companies use to avoid double taxation. More importantly, transfer pricing or profit shifting is not a practice that in any way has been enabled by or augmented by the internet or connectivity.
The fact is that internet firms are less likely to minimise their tax burden than traditional industries. A comparison of the effective tax rates (ETRs) paid by some of the world’s largest firms shows that internet firms providing online services pay on average similar taxes than other leading businesses across the Asia-Pacific region (Table 1). Unlike other services, online services and e-commerce platforms are also often subject to sales taxes in the overseas jurisdiction on what their customers pay for downloads or advertisements.
Moreover, some Asian manufacturing exporters or financial institutions receive preferential tax breaks while internet companies (regardless of their origin) belong to some of the least subsidised and least politically favoured sectors in most of the economies. For example, some major Asian enterprises (including the incumbent telecom operators) are state-owned, and are allowed to run losses or are exempt from corporate taxation.
Table 1: Average Effective Tax Rates (ETRs) of leading online services providers compared to other leading Asia-Pacific MNCs, five-year average (2012-2016) 
Source: Based on corporate income taxes paid and net income reported by the annual reports of the firms (supplemented by data from Ycharts.com, Bloomberg, Reuters and Shareinvestor.com, KPMG website)
Note: The average tax rate paid by American digital MNCs is calculated as an average of average effective tax rates paid by the five leading online services providers in the US: Alphabet, Amazon, Apple, IBM and Microsoft.
In addition, leading companies in Silicon Valley pay similar, or even higher, rates than those paid by many other internet companies in the Asia-Pacific region, including internet firms like Tencent and Alibaba.
There are simple explanations as to why the American internet firms pay similar or even higher taxes than their counterparts in the Asia-Pacific region. Firstly – and perhaps most obviously – the globally agreed principles of taxation require that corporate taxes must be paid where the core functions or assets are placed and business risks are taken. For Silicon Valley firms, that means the US. However, statutory corporate income tax rates in the US are considerably higher than all of Asia-Pacific, which is why the effective tax rates of US firms also tend to be higher. 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 – and not vice versa.
Secondly, the US is restrictive about allowing deduction of taxes paid to foreign governments. The US does not offer tax exemptions that open up possibilities for profit shifting like some European governments do for their retail and media businesses.
In conclusion, the new breed of online businesses is by no means unfair beneficiaries or exploiters of the current tax regimes, but quite the opposite. As both Silicon Valley and Asian internet firms evidently pay taxes, and do so at the average (or higher) rates than traditional offline companies, the issue is in essence about tax collection: Where (rather than if) corporate taxes are paid.
 Effective Tax Rates (ETRs) indicate corporate income tax paid as a percentage of the firm’s net income before taxes. See Box 1 for details on calculation of ETRs.