How ‘Digital Trade’ rules would make it harder for lower-income countries to tax or regulate the digital economy

International tax rules and international trade rules are unfair to lower-income countries: that is not only well known, but unsurprising. Rules are generally set by the most powerful parties at the table. What is more, the tax rules and the trade rules interact, with trade rules frequently inflicting damage on the tax systems of lower-income countries.

The rapid transition to a digital economy is sharpening these inequalities and problems, and throwing up some new ones. An important new report put together by the Third World Network (TWN) lays out the issues in detail.

Specifically, it says:

New rules are being developed in free trade agreements (FTAs) and proposed in the World Trade Organization (WTO) in the name of ‘electronic commerce’ or ‘digital trade’ that will constrain the governance, regulation and taxation of the digitalised economy.

For example, some parties in high-income countries are pushing in trade negotiations to ban permanently customs duties on electronic transmissions. This is, for many countries, a vital source of income, as the TWN report points out:

As the TWN report rightly points out:

Those who demand that developing countries accept a permanent ban on this tax policy option seek to lead them, handcuffed and blindfolded, into the fiscal unknown. All countries, but especially those from the Global South [lower-income countries], should refrain from participating.”

The TWN report examines the different areas of international trade and tax policies in detail. It contains a trove of examples, analysis and details, such as this:

This gives additional power to global multinationals, since trade rules may prevent governments from (for example) insisting that servers processing data about their citizens are located in their territory, so that countries could not ensure that at least one copy of the relevant information is held there. This further increases power imbalances between weak governments and powerful multinationals.

There is no space here to discuss the wide range of issues that this landmark report throws up. We will merely highlight what may be the most important point:

trade and tax officials tend to act in silos as they seek solutions to the novel challenges posed by a digitalised economy that is dominated by MNEs that have no local presence.
. . .
Most developing countries seem to be fighting a rear-guard action on both the tax and the trade fronts over proposals they desperately need to influence. It is time for policy-makers and regulators to leave their silos and pursue synchronous international tax and trade strategies that are both based on tax and trade justice.”

Indeed. Now read on . . .