The year 2018 begins with a rare moment of accomplishment for the Trump administration: The United States is verging on the nation's biggest overhaul of its tax code for a generation, which will radically cut taxes on profits by US multinationals that repatriate their overseas earnings back to the US.
Since these profits are currently re-invested in Asia, the consequences are worrying the finance ministers of Asia and Europe. At the same time, Asian and European governments themselves have been lobbying for a change in how multinationals, and in particular internet companies, should be taxed.
It seems Thailand and the US are on a verge of a war over the question of where companies like Amazon, Facebook, Google or Apple should pay their taxes. Regardless of who you ask, the answer seems to be "here", since every taxman in the world -- in Paris, Bangkok or the US Inland Revenue Service -- thinks Silicon Valley owe them taxes.
But the fact is all exporters are required to pay the majority of their taxes in one place: at home. According to the tax agreements that governments around the world agreed upon, multinationals are only required to pay corporate income tax (as opposed to sales taxes) where they have a "permanent establishment", rather than in every single country they trade with. If global commerce is going to work for all the world's consultants, car-makers, silk weavers and internet entrepreneurs alike, it is of equal importance to avoid double-taxation with the same zeal as we fight tax avoidance.
After all, who'd bother to export to other countries if you had to pay taxes twice, and end up paying more tax than you make? International tax agreements recognise that companies should not pay once at home and again in foreign markets -- at least until now. Countries like France are diverging from the principle and singling out US tech firms to double-tax them, or to calculate their taxes on turnover rather than profits; Indonesia and Thailand have gone after US tech firms on a similar basis, and Vietnam and Korea have immediately followed suit. But these countries are not just frightening off investors and undermining the rule of law, they are hurting their own economies in the process.
To begin with, it is a misconception that Silicon Valley can register a business anywhere and navigate between tax systems. An examination of the taxes paid by Facebook, Google, Apple and Amazon shows they pay far more than other major Asian multinationals and telecom companies, and more than local Asian tech companies like Samsung, Tencent, FTP Group (Vietnam) or Indosat (Indonesia).
The reason why? US companies pay most of their taxes in the US, where statutory tax rates have been much higher. If Silicon Valley really wanted to avoid taxes, they would have relocated to Asia. The question is not whether companies pay their fair share of taxes -- which they all do -- but where they pay them.
Another illusion is how internet companies are causing the corporate tax base across Asia to erode. But the opposite is true: Thanks to trade, corporate tax revenues in China, India and the Asean countries are growing, helping to lower taxes on local workers -- faster than the economy is growing. Tax revenues have doubled since internet usage took off in Asean.
As internet firms pay more taxes than local firms, governments are trying to address a problem with the internet that doesn't exist. Even if there was a problem with multinationals in general, or the internet in particular, the question is whether companies are to blame. Respectable governments offer favourable and predictable tax environments to attract foreign businesses or encourage local entrepreneurs to stay. Governments, not the internet, are causing the trouble with corporate taxation, and companies are merely responding to these incentives.
Asian countries belong to the group that benefits most from the current arrangements as they export more than they import -- so if Indonesia or Thailand could tax Silicon Valley, but their exporters were required to pay taxes in the US or Europe, every Asian country would be at a net loss. Lower taxes have been used to attract Western multinationals to invest for decades, and the US tax reforms are to some extent a response to that.
Governments must be honest and admit it's their policies that are causing the issue. In 2018, governments are bound to wage their war against each other, and not just against foreign businesses.
Hosuk Lee-Makiyama is the director of the European Centre for International Political Economy (Ecipe).
