Digital taxation may keep the economy afloat, but will businesses survive?

Online platforms, streaming networks, digital channels—there’s more traffic in these avenues than there is on the streets. With economic pressures intensifying by the day, local and international governments are looking at digital taxes to beef up economic recovery funds.

How will a series of taxation laws affect global businesses that made the transition to online services? Will this pose steady revenue growth or cause significant decline due to high operational costs?

The Philippine government is seeking ways to tax online shopping, social media advertisements, and streaming platforms. House Bill 6765 or the Digital Economy Taxation Act mandates direct and indirect taxes from online services (or “network orchestrators”) such as Grab, Lazada, Angkas, and Foodpanda as e-commerce continues to be a stable component of our economy today.

Tax from the income of riders, suppliers, and partners will also be withheld while value-added tax (VAT) will be imposed on sales of local or international digital advertising services. The increase in withholding tax, which is at 10 percent, will directly affect services that deal with corporations. In the case of Foodpanda, it’s their food suppliers. The use of these delivery services will have to adjust their costs and thus trickle down to its food business partners and consumers.

House Bill 6765 or the Digital Economy Taxation Act mandates direct and indirect taxes from online services (or “network orchestrators”) such as Grab, Lazada, Angkas, and Foodpanda as e-commerce continues to be a stable component of our economy today.

Other countries are also turning to taxation in the digital economy. In Indonesia, a 10 percent VAT was imposed on foreign digital products. This includes popular streaming services and other applications and digital games. Their government is expecting the largest fiscal deficit in a decade which is at 5.1 percent, attributing to a projected 10 percent drop in revenue. However, their digital economy is expected to generate $130 billion in five years, which is why digital taxes pose a significant effect on their post-pandemic growth.

India also placed a two percent tax on foreign digital services, even on e-commerce revenue on sites such as Amazon. Similar digital taxation proposals are also being reviewed in Kenya while France, which has already been looking into the matter for a couple of years already, said it would implement a levy by the end of 2020. 

But even before the COVID-19 pandemic caused global economies to stagger in a span of three months, some countries have already introduced taxation on digital services. In the beginning of the year, Malaysia had a six percent digital tax while Singapore included digital services in their expanded goods and services tax (GST). Norway started applying VAT rules in 2011 at a rate of 25 percent while New Zealand carried out an expanded GST of 15 percent. In 2017, Russia introduced an 18 percent digital tax, which has been revised to 20 percent.

The challenge of digitized economies lies in whether it has the capability to function across all sectors of the industry, inclusivity- and sustainability-wise.

These digital tax reforms inevitably faced opposition before and during the pandemic, mostly in the U.S. where companies who run these digital platforms are based. According to Oxford Business Group, the U.S. Trade Representative, the government agency that oversees the development of trade policies, will launch probes and trade blocs to introduce new taxes on digital firms. They will be investigating Austria, Brazil, India, Indonesia, Italy, Spain, Turkey, the Czech Republic, the European Union, and the United Kingdom despite notions that these digital taxes are mainly targeted towards U.S.-based firms such as Apple, Facebook, and Google.

It was also reported that the US postponed talks on global taxation laws with France, Italy, Spain, and the UK, warning that increased tariffs will be applied if taxation plans are pressed ahead. Such disputes threaten global efforts to tax tech companies. The Organization for Economic Cooperation and Development is collaborating with nearly 140 countries to craft and remodel international taxation rules for digital firms as the sector has already grown so much in the past few decades.

The increase in digital local options can be an indication of the potential of e-commerce in a country. Businesses will have to delve deep into how online services can be utilized to reach newer markets without having to exhaust all resources, such as through social media advertisements or setting up their own digital platforms.

The industry’s major transition online shows that technology is a good business investment, no matter the scale of the operations. But it won’t be long until these platforms will have to bear the burden of digital taxation. Businesses still need to be secured in a future anchored on digital markets. 

Despite its promising drive in economic activity, lawmakers are expected to sift through the best alternatives for financial backing that don’t heavily rely on technological platforms. The challenge of digitized economies lies in whether it has the capability to function across all sectors of the industry, inclusivity- and sustainability-wise.