ASIA: China urged to address global digital tax rules to avoid ‘new tariff war’ as G20 push for July consensus.

As published on scmp.com, Wednesday 21 April, 2021.

China needs to avoid the potential of a “new tariff war” and play a more active role in how taxes are applied to the digital economy, warned the former head of its central bank, in response to a new US government proposal that could allow for major economies to agree on uniform tax rules for digital firms.

China has not yet paid enough attention to the issue of taxation of digital goods and services, which has risen to become an important item on the international agenda, according to Zhou Xiaochuan, who served as the governor of the People’s Bank of China (PBOC) for over 15 years.

“A clear starting point of concern over this issue is that [various countries] should avoid falling into fights with each other over the digital tax, especially about whose wallet the money raised from the digital tax belongs to,” Zhou said at the Boao Forum for Asia on Wednesday.

“A new tariff war would not be good for the globalisation advocated by China, to multilateralism and to the rules-based international order, and if it occurs, it is likely that most of the countries will respond by showing protectionism. That is why we need to study [the digital taxation issue].”

US Treasury Secretary Janet Yellen announced in February the withdrawal of a safe harbour proposal for digital companies – which came to light in December 2019 – a move that now paves the way for a digital tax on the likes of Facebook, Google and Amazon, which have long been accused of exploiting loopholes to minimise their tax bills.

This forms part of the two-pillar global taxation scheme pushed by the Organisation for Economic Cooperation and Development, which involves taxing digital giants where they make their profits even if they do not have a physical presence within that jurisdiction.

The Group of 20 (G20) hopes to reach a consensus over the digital tax issue by their meeting in July, which requires member countries including China and the US to negotiate in earnest.

At the start of April, Yellen urged the adoption of a minimum global corporate income tax, citing a “30-year race to the bottom” in which countries have slashed corporate tax rates to attract multinational businesses.

Yellen stressed that competitiveness is about ensuring governments have stable tax systems and revenue to “invest in essential public goods.”

Then, after a meeting of finance ministers and central bank governors earlier this month, Italian Finance Minister Daniele Franco said that the G20 was “committed to reaching an agreement, hopefully we expect it to take place in July”.

Franco confirmed the discussions were focused on two pillars of global international taxation: The fair allocation of profits among different countries where multinationals operate, and the global minimum effective tax rate.

A concern for China, though, might be the impact a global minimum corporate tax could have on Hong Kong – the seventh-largest tax haven in the world and the largest in Asia, according to an analysis published earlier this year by the Tax Justice Network, a tax advocacy organisation, ahead of Singapore at number nine.

The minimum corporate tax concept has potential risks for Hong Kong, through which some 70 per cent of foreign investment from the Chinese mainland is now channelled. One of the key advantages for a business to establish itself in Hong Kong and source its mainland-generated revenue is its low tax burden, so forcing Hong Kong to raise its corporate taxes could reduce its appeal as a business location.

China’s taxation system already covers the digital sector, according to Zhou, as companies need to pay their value-added taxes and corporate income taxes. However, Beijing has not yet paid enough attention to the cross-border taxation perspective, he said.

Zhou attributed this to the fact that the major internet service platforms operating in China are mainly developed by domestic firms, so that China does not face the same taxation challenges as nations in Europe, where US technology giants seek to locate their operations in low-tax European Union countries while operating in all European Union nations.

“Since our own problems are not prominent, [China’s] study should demonstrate our internationalist position and [advocate for] the ‘community of a shared future for mankind’,” Zhou added.

“Protectionist sentiment or tariff wars are not in an escalating or increasingly tense trend as they once were in the past three or four years.”