digital services tax, international taxation, significant digital presence, location-specific rent, digital platforms
As 2018 nears its end, a digital service tax (DST) seems imminent in Europe, yet elaborations of the DST’s motivations have so far come primarily from the European Commission and the UK Treasury: academic and practitioner commentators remain largely skeptical. This paper offers a new conceptual defense of the DST that is independent of the existing government positions. I argue that a clear case can be made for the DST as a way of taxing location-specific rent earned by digital platforms. While the DST may also be partially motivated by other, potentially conflicting visions for reforming international taxation, such as destination-based apportionment or greater protection of the “source-based” taxing rights, the justification in terms of taxing location-specific rent both is distinct from and arguably offers a more compelling fit with the current policy focus of European governments than these other visions.
Conceiving of the DST as a tax on location-specific rent allows principled replies to its critics. Two of the most prominent critiques point to the DST’s character as a turnover tax, and the fact it is not coordinated through the renegotiation of income tax treaties. With respect to the first critique, it can be countered that digital platforms enjoy low marginal costs of production, implying that the difference between taxing revenue and taxing profit is small. The fact that many platform companies potentially subject to the DST are in fact loss-making does not make the DST inefficient; indeed, the DST may enhance efficiency by deterring excessive entry and market fragmentation in natural monopoly contexts. With respect to the second critique, it can be argued that a tax on location specific rent requires less coordination through tax treaties since a deduction for DST paid would leave an appropriate corporate tax base for other countries. Moreover, it is unlikely that traditional profit attribution methods under tax treaties would help with the identification of location specific rent (and the consequent allocation of taxing rights). Therefore it is unclear that treaty-based coordination would improve the efficiency of the tax.
A conception of the DST as a tax on location-specific rent, however, is in tension with certain specific features of the EC’s DST proposal, as well as the EC view that a “long-term solution” that relies on the concept of significant digital presence (SDP) is superior. The conceptual defense of the DST offered in this paper thus casts a new light on both sides of the debate.
Wei Cui, "The Digital Services Tax: A Conceptual Defense" (2018) [unpublished].