Can These Creative Taxes Catch Up With a Changing World?
WHY YOU SHOULD CARE
Because as your lifestyle changes, so do governments' attempts to tax you for it — and that could dictate your financial decisions for decades to come.
By Nick Fouriezos
- The pandemic, tech and globalization have combined to change the way we live, earn, buy and sell in fundamental ways.
- Countries are adapting by introducing digital taxes and surcharges for electric vehicles based on how much they’re driven — and are plotting ways to get Big Tech to pay its dues.
- Others that want visitors desperately are slashing tax rates for digital nomads.
As Tesla’s stocks soared in November, multiple Australian states decided the time had come for them to get innovative about revenue generation. Most countries tax gasoline and diesel, but those earnings are under threat as more and more people shift to electric vehicles. So Australian states introduced a new tax: Electric vehicle drivers would need to pay based on the distance they drive.
It’s just one of a series of new taxation strategies that a host of countries are embracing to adapt to a world transformed by the pandemic, technology and globalization in ways unimaginable even a decade ago.
Tech giants that earn billions of dollars in major economies but pay only a relative pittance in taxes are among the biggest targets. In August, Indonesia introduced a 10 percent value added tax on earnings made by Facebook, Disney, TikTok and other digital firms in that country. Canada has announced it will introduce a similar tax in 2022, while India is mulling this approach too.
The Organization for Economic Co-operation and Development (OECD) grouping of 37 wealthy nations is debating a set of rules to govern the taxation of online firms. Meanwhile, Kenya launched a new digital tax on Jan. 1 that covers all profits from online activities. Nigeria is preparing a similar tax. Several nations are introducing or strengthening digital regimes that will allow them to tax goods and services purchased online from another nation. At the moment, goods and services are predominantly taxed only at the point of origin.
At the other end of the spectrum, small, tourism-dependent nations are opening their arms to digital nomads fleeing pandemic-stricken countries. Some, like Barbados and Costa Rica, are waiving income taxes entirely for anyone who comes, while others, such as Greece, are cutting their burden in half.
Rapid changes present both design problems (what sort of taxes should we have) and implementation problems (how should we collect them).
John Quiggin, Australian economist
These creative attempts at recrafting the idea of taxation aren’t all going to work, experts say. But these maneuvers — wide-spanning, covering different industries and various changes in human behavior — underscore a recognition from countries that taxation strategies must stay nimble to keep pace especially with technological changes.
“Rapid changes present both design problems (what sort of taxes should we have) and implementation problems (how should we collect them),” writes Australian economist John Quiggin in an email. In the case of taxing international vendors that profit off digital platforms, the primary issue is implementation: The sales are taxable in Australia — through its Goods and Services tax — but without a brick-and-mortar presence, there is “no obvious point of collection,” Quiggin writes.
Australia now taxes all online purchases that are imported, even if they’re of a value less than $1,000; it taxed larger imports even earlier. India introduced a similar tax in April. Still, that leaves gaps, Quiggin adds. “Almost certainly, lots of imports are avoiding the tax, including items purchased on the dark web.”
Traditionally, taxation has been levied in the place where goods or services are created, rather than where they were delivered — a system that worked well when companies and markets were more geographically connected. A consulting firm based in the United States paid its taxes there, while a factory based in Beijing would render unto China what is China’s, to modernize the old biblical proverb.
But what do you do when American consultants are advising Mexican firms? Or when the entire Chinese factory output is headed to European markets?
Groups like the OECD are arguing that “there may be a justification for the country where the service is delivered to have a taxing right,” says Daniel Bunn, vice president of Global Projects at the libertarian-leaning Tax Foundation think tank. As more and more value is generated from “intangible assets” — things like software, patents or intellectual property, as opposed to physical materials like furniture or cellphones — companies are more able to pick their location to maximize profits and minimize taxation. “For tax-planning purposes, they are a little easier to shift around than, say, a factory with a bunch of workers,” Bunn says.
The same challenges for businesses lie for employees or contractors moving further and further from their places of work. Traditionally, a New Yorker or Seattleite who decides to work remotely from another state or country during the pandemic would be expected to pay taxes (or at least file them) in their new locale. But that can quickly become messy for those who change borders often.
That’s partly why popular tourist destinations like Barbados and Costa Rica have created special “digital nomad” visas that waive the requirement to file taxes at all for a while. Not only does this make temporary moves more attractive and help bring foreign spending to local economies, but it may also create future tax residents among those who choose to stay. “If you’re a country facing a demographics crisis, maybe this is an ability to use one of your best natural resources — your climate — to attract new taxpayers,” Bunn says, potentially locking them in “for the long term.”
But many tax-policy experts worry that countries are getting too myopic in their goals. “It’s important for tax policies to be able to adjust and innovate, but countries’ policymakers shouldn’t get stuck thinking about just one business model,” Bunn says. At the moment, digital taxes are clearly that “model” that multiple nations are attempting. But as 2020 showed, it takes little for the world to change dramatically. “You don’t know what’s coming next around the corner.”