Ever since the World Wide Web was invented, new paradigms have come forward which have changed or challenged the status quo in business, economy, social relationships, politics, academy and practically every aspect of our lives. Some aspects have adapted and changed very fast, like social networking, while others have made small changes or none at all. In this last category, one issue which has been postponed worldwide once and again has been the taxation on sales done by an Online supplier of one country to a customer of another country.
The US, through the Internet Tax Freedom Act under the Clinton Administration, established the first fiscal policy for the Online world. This law bars federal, state and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes. The law also bars multiple taxes on electronic commerce. This Act was meant for the US alone. But in those early years of the www, the US had a paramount piece of the Online economy, whereas for most of the rest of countries, the Internet Economy did not exist, or was so small that it did not deserve attention in fiscal or economic matters.
As the US was the main supplier of goods and services during the early years of the www, and the rest of countries did not pay much attention to the Online commercial flow, the inter-country taxation issue was taken care of by itself, with a de facto treatment which has meant in many cases that an Online sales is taxed twice (in the country of origin and in the country of destination). Even if this goes against the spirit of the Round of Uruguay's framework for international movement of products and services, no attempts have been made to study or change the matter by the WTO or any other World organization - as far as I know.
Since the World Wide Web was invented and a digital economy came forward, many products which were "physical" have gone digital, and many others have transformed from product to service. The ever increasing e-Commerce and the new economic paradigm of Cloud Computing have finally made this issue pop up, and it has happened in year 2013. The trigger has been, in all cases, the same product (or service) from the same Company.
Google's core product is its advertising tool named Adwords. It is invoiced centrally by Google, although with the different currencies of the countries where it is sold. When an Adwords customer signs the terms of contract - digitally, of course - it agrees to pay whatever local taxation might there be.
Chile had an special income tax passed in 2007 for income of corporations not present in the country which sold services to corporartions or people living in the country. This meant the Chilean IRS (named Servicio de Impuestos Internos or SII) understood that any offshore service done to a resident would be considered as if the service was done locally, and therefore it must pay taxes on profits. Since the profit cannot be determined, it was stated that the tax would be of 35% over sales. This amount should be paid by the Chilean customer on behalf of the foreign company. This fiscal treatment was designed specially for loans given by foreign Banks to local companies, and it affected the interests paid by the local company to the foreign Bank.
This year the SII decided that this should also apply to sales of Adwords to local corporations, and a fiscalization was done for those corporations which had contracted the service, on a retroactive basis from fiscal year 2010 through 2012. A bunch of small and medium Digital Marketing companies who sold advertising for big companies were caught unaware, to the extent that many of them are facing bankruptcy if the tax were made effective. Hence, an agrupation of entrepreneurs have recently filed the SII for what they regard as a missinterpretation of the income tax passed.
Chile is a small country, and whatever Google sells there is a minimal part of its overall sales in the World. But Chile is a full Member of the OECD, and has become the first country ever to establish a fiscal policy regarding income taxation of Online services provided by foreing companies not established in the country (Google does have an office in Chile, but it does not sell Adwords).
Chile has not been the only one to put the issue in the Agenda, though. Italy has passed a bill during year 2013 nicknamed the "Google law" by which Adwords can only be sold by companies established in Italy, thus affected to Value Added taxation as well as Income taxation like any other local company. The law has not been put into effect yet due to protests from the EEC parliament which considers that such fiscal policy should be discussed and approved previously in the European Community. Politicians in France and Germany also pressed their Parliaments during 2013 for introducing the "Google Law" into their countries. And Australian citizens, recently polled, expressed their displeasure for the fact that Google issued its Adwords invoices from a fiscal paradise, and no taxation was left in the country which made Google earn that money.
So one way or the other the inter-country taxation for Online services and products has at last popped up during 2013, affecting it from different sides. And the consequences it may have for the development of the Internet Economy may be huge, unless the issue is addressed properly and promptly, before it gets too big and too entangled to come to a worldwide agreement. At least, discussions should be opened as soon as possible.
Adwords is just the tip of the iceberg. A huge effect is coming around through Cloud Computing, the Internet of Things, and the Automation of Knowledge work. According to the Mc Kinsey Report "Disruptive technologies: Advances that will transform life, business, and the global economy", these three technological disruptions will impact the world economy in a value worth 10 to 20 trillion dollars. Most of this new economic value will mean services and products which will be offered from any country to customers all over the world, in an Online basis. This amount involved with the Chilean precedent of 35% taxation over sales as an income tax would be too big a temptation for always-needy tax collection organisms in most countries. Following the principle contained in the Chilean case, it would also affect very small transactions, such as iTunes songs which are sold for less than a dollar.
If Chile's IRS pledge is confirmed, it would have de facto established a customs duty for foreign Online services of 35% over sales, even though it was intended as an income tax. Local cloud computing companies would be very happy with that state of affairs, local customers less so. It is also worth asking if citizens as well as corporations should be made liable in front of their local IRS authorities on income taxes meant for foreign corporations. Specially in the case of paying 35 cents on each dollar song they bought from Apple!
What if other countries around the world follow the example? After all, it would be a tremendous fiscal revenue source. And paradoxically, it would mean exactly the opposite than what the Internet Tax Freedom Act intended to be. Worst of all, it could affect the free flow of services and products which the Internet has brought about, and which have been so beneficial for creating wealth and jobs, as yet another Mc Kinsey Report (Internet Matters: the Net's sweeping impact on growth, jobs, and prosperity) states. It could make citizens of some countries pay a lot more than citizens from another country for the same service. Or, it could mean some citizens would simply have no access to some services and products which are sold Online. That would go against all what has been the ultimate goal of the World Wide Web since it was founded: a transparent vehicle for humankind to access to knowledge, culture and wealth.
Maybe it is a good thing to tap what has happened with Google Adwords in several countries to finally address the taxation issue and work a win/win solution before it is too late.
Alfredo Barriga
Former Secretary for Digital Development, Chile
