How to bring tech giants under taxation

Illustration: TBS

Tech giants, especially Silicon Valley companies like Google, Amazon, Microsoft, Facebook etc have been wonderful in making human lives far more convenient than ever before. 

But there is a caveat. 

These were revolutionary technologies developed by obscure nerds, often using programming and technology no one else understood. Consequently, nobody foresaw that the Silicon Valley companies would one day become the Rockefellers of the 21st Century. 

So when tech giants exponentially grew and expanded beyond borders, and that too without actually moving their physical offices or personnel, governments could not figure out how to bring them under tax regulations. And the Government of Bangladesh was no exception.

Addressing this issue, the Centre for Policy Dialogue (CPD) recently held a dialogue on 'Taxing the Digital Economy: Trade-offs and Opportunities' in conjunction with the European Union (EU). 

During the event, the CPD suggested that the rapidly expanding digital economy in Bangladesh should be subject to taxation to assist with the government's resource mobilisation efforts. The think tank recommended that well-considered and transparent tax incentives be put in place based on a particular sector's development status and maturity, with clear reasoning for any exemptions or protections.

The CPD also called for major tech companies such as Google, Facebook, and YouTube to be brought under local tax regulation through the forthcoming Finance Act, while local entrepreneurs emphasised the importance of fairness in digital economy taxation. 

According to Professor Mustafizur Rahman, Distinguished Fellow at the CPD, local companies in Bangladesh currently provide advertising worth approximately Tk20 billion to global tech giants, but their income falls outside the scope of income tax. He added that the imposition of taxes on such new services is necessary to increase domestic resource mobilisation.

However, while it is intuitive to argue that tech giants should pay their fair share of taxes, actually collecting taxes from them turns out to be quite difficult for even developed economies in Europe, let alone least developed economies like Bangladesh. 

Then how do you regulate tech giants, each of which boasts revenues of roughly 50% of Bangladesh's GDP, especially since they do not have any physical presence (office, hiring etc.) in your country? 

To understand that, we first need to know how they indeed avoid paying taxes.

How tech giants avoid paying taxes

Tax avoidance by large digital companies first came to the forefront of global discourse in 2012 when Google and Amazon came under fire for using loopholes to avoid paying their fair share of taxes in the United Kingdom. The controversy centred around the use of transfer pricing and royalty payments to shift profits to subsidiaries in countries with lower tax rates and offshore tax havens like Bermuda.

Later in 2017, Google was again caught moving $22.7 billion through a Dutch shell company to Bermuda. In the same year, Facebook paid just $9.6 million in corporation tax in the United Kingdom, despite generating $1.62 billion in revenue there.

This tactic to avoid paying taxes in countries is known as Base Erosion and Profit Shifting (BEPS). BEPS refers to the employment of tax planning methods that take advantage of inconsistencies and loopholes in tax regulations to artificially transfer profits to regions with low or no taxation and where there is minimal or no economic activity. This can also involve reducing tax bases by using deductible payments, such as royalties or interest.

How other countries plan to tax tech giants

The public outcry and political pressure that followed the scandal prompted the UK government to launch an investigation into the tax practices of multinational companies and introduce measures to crack down on tax avoidance in 2013. 

Since then, developed economies, especially the OECD (the Organisation for Economic Cooperation and Development), have been trying to reform international tax rules and close loopholes to prevent companies from shifting profits to low-tax jurisdictions and avoiding taxes. 

The OECD's plan to tax tech giants is a part of these efforts to address this issue and ensure that large multinational companies pay their fair share of taxes in the countries where they do business.

The OECD has proposed a two-pillar plan to address challenges in taxing multinational tech companies or companies that make money from cross-border digital services. The first pillar seeks to allocate taxing rights based on where companies create value, not just their physical presence. The second pillar aims to establish a global minimum tax rate of 15% to prevent companies from shifting profits to low-tax jurisdictions.

Many countries, including the United States, have expressed support for the plan, and negotiations are ongoing to finalise its details. The proposed changes have the potential to significantly increase tax revenue worldwide and create a more equitable environment for businesses. However, there are still some debates and concerns among different countries about the specifics of the plan and how it will be implemented.

While the original OECD plan included only the developed members of the organisation, it also launched a broader framework called the BEPS Inclusive Framework, which would ensure the implementation of the two pillars proposed by the OECD worldwide. 

As of December 2022, 142 countries have become members of the OECD/G20 Inclusive Framework on BEPS.

What can Bangladesh do?

As part of the OECD plan, tech giants would be subject to a 15% (of total profit from a given region) global minimum tax in all 142 member countries of the BEPS framework. Unfortunately, Bangladesh is not a signatory to this framework and I could not find any good reason for not doing so. 

However, Bangladesh cannot unilaterally levy arbitrary taxes on tech giants like Google or Facebook either. France tried to do that in 2020 to raise funds to tackle the Covid-19 pandemic. But it nearly led to a trade war between the US and the French, as the US blamed France for being impatient, violating the global consensus (referring to the OECD) and singling out US companies. Given that the US and China are two of Bangladesh's major trading partners, it would not make sense to antagonise them by unilaterally imposing taxes on tech companies (which mostly originate from these two countries). 

What Bangladesh can do instead is join the BEPS framework, and bring Google and Facebook under corporate tax regulation. And even if it intends to introduce unilateral taxation on offshore tech giants, it should do so by adhering to the two pillars proposed by the OECD. 

Undoubtedly, Bangladesh needs to figure out a way to bring the digital economy under its tax regime. However, the GoB needs to be careful in implementing said tax reforms and should learn from the best practices in other countries to avoid antagonising its long-term partners in China and the US.