{ "id": "R45532", "type": "CRS Report", "typeId": "REPORTS", "number": "R45532", "active": true, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 592050, "date": "2019-02-25", "retrieved": "2019-12-20T19:55:47.089572", "title": "Digital Services Taxes (DSTs): Policy and Economic Analysis", "summary": "Several countries, primarily in Europe, and the European Commission have proposed or adopted taxes on revenue earned by multinational corporations (MNCs) in certain \u201cdigital economy\u201d sectors from activities linked to the user-based activity of their residents. These proposals have generally been labeled as \u201cdigital services taxes\u201d (DSTs). For example, beginning in 2019, Spain is imposing a DST of 3% on online advertising, online marketplaces, and data transfer service (i.e., revenue from sales of user activities) within Spain. Only firms with 750 million in worldwide revenue and 3 million in revenues with users in Spain are to be subject to the tax. In 2020, the UK plans to implement a 3% DST that would apply only to businesses whose revenues exceed \u00a325 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of \u00a3500 million annually. The UK labels its DST as an \u201cinterim\u201d solution until international tax rules are modified to allow countries to tax the profits of foreign MNCs if they have a substantial enough \u201cdigital presence\u201d based on local users. The member states of the European Commission are also actively considering such a rule. These policies are being considered and enacted against a backdrop of ongoing, multilateral negotiations among members and nonmembers of the Organization for Economic Cooperation and Development (OECD). These negotiations, prompted by discussions of the digital economy, could result in significant changes for the international tax system.\nProponents of DSTs argue that digital firms are \u201cundertaxed.\u201d This sentiment is driven in part by some high-profile tech companies that reduced the taxes they paid by assigning ownership of their income-producing intangible assets (e.g., patents, marketing, and trade secrets) to affiliate corporations in low-tax jurisdictions. Proponents of DSTs also argue that the countries imposing tax should be entitled to a share of profits earned by digital MNCs because of the \u201cvalue\u201d to these business models made by participation of their residents through their content, reviews, purchases, and other contributions. Critics of DSTs argue that the taxes target income or profits that would not otherwise be subject to taxation under generally accepted income tax principles. U.S. critics, in particular, see DSTs as an attempt to target U.S. tech companies, especially as minimum thresholds are high enough that only the largest digital MNCs (such as Google, Facebook, and Amazon) will be subject to these specific taxes. \nDSTs are structured as a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits. A tax on corporate profits taxes the return to investment in the corporate sector. Corporate profit is equal to total revenue minus total cost. In contrast, DSTs are \u201cturnover taxes\u201d that apply to the revenue generated from taxable activities regardless of costs incurred by a firm. Additionally, international tax rules do not allow countries to tax an MNC\u2019s cross-border income solely because their residents purchase goods or services provided by that firm. Rather, ownership of assets justifies a country to be allocated a share of that MNC\u2019s profits to tax. Under these rules and their underlying principles, the fact that a country\u2019s residents purchase digital services from an MNC is not a justification to tax the MNC\u2019s profits.\nDSTs are likely to have the economic effect of an excise tax on intermediate services. The economic incidence of a DST is likely to be borne by purchasers of taxable services (e.g., companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions. As a result, economic theory and the general body of empirical research on excise taxes predict that DSTs are likely to increase prices in affected markets, decrease quantity supplied, and reduce investment in these sectors. Compared to a corporate profits tax\u2014which, on balance, tends to be borne by higher-income shareholders\u2014DSTs are expected to be more regressive forms of raising revenue, as they affect a broad range of consumer goods and services. \nCertain design features of DSTs could also create inequitable treatment between firms and increase administrative complexity. For example, minimum revenue thresholds could be set such that primarily large, foreign (and primarily U.S.) corporations are subject to tax. Requirements to identify the location of users could also introduce significant costs on businesses.\nThis report traces the emergence of DSTs from multilateral tax negotiations in recent years, addresses various purported policy justifications of DSTs, provides an economic analysis of their effects, and raises several issues for Congress.", "type": "CRS Report", "typeId": "REPORTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/R45532", "sha1": "e67360669b802b3f2b91378ca3966bdcb0394490", "filename": "files/20190225_R45532_e67360669b802b3f2b91378ca3966bdcb0394490.html", "images": { "/products/Getimages/?directory=R/html/R45532_files&id=/1.png": "files/20190225_R45532_images_60b288a60f89172e9f1b079dc80655bb45f63480.png", "/products/Getimages/?directory=R/html/R45532_files&id=/3.png": "files/20190225_R45532_images_31844ee4a34f211983dafc076fa3e684b025139f.png", "/products/Getimages/?directory=R/html/R45532_files&id=/2.png": "files/20190225_R45532_images_b92036dcda0b09f8a531de485977a1731124a404.png", "/products/Getimages/?directory=R/html/R45532_files&id=/0.png": "files/20190225_R45532_images_598b6d50ff85e8a0b5fc629c0ade4e89d0e5ca0e.png" } }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/R45532", "sha1": "fab3b713f012038983da04c124f162170410f3e2", "filename": "files/20190225_R45532_fab3b713f012038983da04c124f162170410f3e2.pdf", "images": {} } ], "topics": [] } ], "topics": [ "Economic Policy", "Foreign Affairs" ] }