[The Editors' Verdict] The Digital Tax in the Digital Age

[Asia Economy Reporter Choi Il-gwon] The introduction of the so-called "Google tax," known as the digital tax, has entered its final countdown. Following the convening of the Economic Committee, the Organisation for Economic Co-operation and Development (OECD) plans to hold a general assembly of member countries over two days on the 29th and 30th (local time) to finalize the introduction of the digital tax and its applicable targets. Just ten days after the tax dispute between the United States and France over digital tax and wine tax, a path has opened to impose taxes on digital economic activities represented by e-commerce and social networking services (SNS).

Last year, the OECD reached two major points of consensus regarding the imposition of the digital tax. The main points include the "unified approach," where countries tax global IT companies such as Google, Amazon, Facebook, and Apple when they generate revenue, and the inclusion of consumer goods companies with high intangible asset values as targets for the digital tax, as well as the application of a "minimum tax rate" to ensure a certain level of tax payment. If the digital tax introduction is confirmed at this general assembly, it is highly likely that not only IT companies but also multinational consumer goods companies will be subject to the digital tax.

The birth of the digital tax can be said to be a product of globalization, which has been in full swing since the 1990s. This is because "digital" has been the biggest contributor to globalization. Based on the internet that connects the entire world as one, social networking services (SNS) and overseas shopping have become possible. The term "digital twins," which means replicating the real world exactly in a virtual space, has become a common term not only in business but also in everyday life. Economic activities conducted in virtual spaces have grown to rival those "offline."

Despite the rapid growth of digital technology, regulations have not kept pace. The sharp conflicts among countries over the introduction of the digital tax itself demonstrate this. There was no proper way to impose taxes when profits were generated through digital services in countries without physical business establishments. The principle that "taxes are paid where income is earned" did not apply in virtual spaces. Moreover, multinational IT companies were relentless in tax avoidance through various methods. Ireland, with its low corporate tax rate; the Netherlands, which does not impose withholding tax on royalties; and Bermuda, a tax haven, were mainly used by these companies to evade taxes.

If the digital tax is introduced, it will help governments increase tax revenues. According to The New York Times (NYT), if France sets the digital tax rate at 3%, it will secure approximately $563 million in additional tax revenue.

However, there is a downside to the digital tax. If the tax is imposed not only on IT companies but also on consumer goods companies, underdeveloped countries may actually suffer. There is a possibility that services provided from countries without physical business establishments could be discontinued due to tax burdens. Some argue that underdeveloped countries may have to forgo their taxing rights to attract large IT companies. It is said that the digital tax could block market entry for services and thereby widen the digital divide. Considering that companies have been leaving the U.S. as the Trump administration raised tariff rates during the trade war, there is ample possibility that the digital tax could hinder companies' market entry.

The digital tax controversy has left the lesson that regulations must quickly follow innovation. In a situation where the sharing economy is spreading and the culture of renting rather than owning is becoming mainstream, taxation poses another challenge. With the development of artificial intelligence (AI), robot taxes and basic income have emerged as new topics. It has become an inevitable time to fundamentally consider "how to apply a tax system that has been in place for hundreds of years to impose taxes on the digital economy."