Digital taxes are key to the Caribbean digital recoveryMonday, September 20, 2021
DIGITAL platforms have become central players in the Caribbean digital economy and have been the “main beneficiaries from the COVID-19 crisis” according to Fitch Solutions. In 2020, revenues of Google and Facebook alone reached US$181 billion and US$84 billion, respectively.
Around the world the question of how to ensure the big tech giants contribute to the societies they derive their revenues from is now firmly on the agenda. The Caribbean can look to innovations in other parts of the world when considering what responses best help address the priorities of this region.
LOCAL TAX CONTRIBUTIONS BY THE BIG TECH GIANTS
An important question facing Caribbean governments is how to fund public services in the context of a fall-off in tax revenues from local businesses that are being replaced by big tech, and as taxes from tourism and consumer spending decline as a result of the novel coronavirus pandemic.
The International Monetary Fund reports that the Caribbean and Latin America region's GDP contraction of seven per cent in 2020 was the sharpest in the world and that income per capita will not catch up with its pre-pandemic level until 2024.
Tax losses also affect the world unequally. By one estimate, tax losses in the region will equal 59 per cent of spending on public health. Such losses affect the pace of digitisation as well and without investment, the Caribbean risks falling further behind developed regions. The World Economic Forum warns that this will lead to the digital exclusion of workers, bringing “livelihood crises” and rising social tensions in the coming years.
In parallel, giants such as Facebook and Google make vast profits from advertising in Caribbean countries without paying any taxes locally. The World Economic Forum notes that, for big tech, COVID-19 has been a major opportunity and they will likely emerge from the pandemic with stronger, more diverse revenue streams and enhanced investment power.
The G7 and Organisation for Economic Co-operation and Development have proposals to address tax avoidance by big tech but there is a concern that these will mainly benefit wealthy countries. Emerging markets are more vulnerable to the economic effects of the pandemic and the tax avoidance strategies of the big tech giants. A recent report on Taxing the Digital Economy by ActionAid proposes that emerging countries should improve rules around taxable presence and digital taxes to big tech, to make up for the difference in their tax contributions.
Many jurisdictions have decided to take action to impose digital taxes on revenues earned locally. Even in the United States itself, a number of states introduced digital taxes during the first half of 2021 including Maryland, West Virginia, Texas and Connecticut, putting into sharp relief US efforts to discourage other countries from taxing big tech.
Caribbean governments are now under enormous fiscal pressure as a result of COVID-19 and as the trend towards the digitisation of the economy accelerates. Following the lead of jurisdictions that have introduced digital taxes on big tech giants would seem to be a logical choice.
National priorities are also shaping governments' responses to the big tech giants in different regions.
In Australia, big tech giants were profiting from news media content produced locally without paying for its use, causing local news media companies to lose advertising revenue. In February 2021, Australia introduced the News Media and Digital Platforms Bargaining Act that obliges big tech giants to negotiate and agree to commercial terms with local publishers and broadcasters for the use of their content.
Although the big tech giants tried to block this, they quickly complied once it became a reality. Despite threats to withdraw services in the face of laws that require them to contribute, big tech giants will ultimately comply with national rules.
In the Caribbean, the expansion of broadband coverage and getting everyone online are key priorities. Internet penetration remains significantly less than the US, Europe, Japan or South Korea. More and more services are provided by the big tech players but the revenues generated by these services do not contribute to the costs of building the broadband networks they use. This is the classic “free rider” market failure where those who benefit from shared resources do not pay for them.
The Florence School of Regulation identifies this as a key problem, finding that “if online platforms are allowed to sideline traditional network operators it may mean that vital investment in building and maintaining the infrastructures on which these markets are founded becomes unsustainable in the long term”.
If Caribbean governments choose to introduce new digital taxes a portion should be earmarked for a government fund for investment in critical digital infrastructure.
The digital recovery from COVID-19 will require that all who benefit from society also contribute to solving local problems. The Caribbean can look to innovations in other parts of the world where governments are acting to ensure that big tech giants contribute to solving local problems by paying their fair share.
David Geary is general counsel at Digicel. Send comments to the Jamaica Observer.