Caribbean governments are continually trying to identify additional sources of revenue for their respective countries. There has been a proposal for Caribbean governments to tax digital commerce. We outline some reasons why it should not be pursued.
This past October, Ministers of Finance from across the Caribbean region attended the 2019 Commonwealth Finance Ministers Meeting, which was held in Washington D.C., in the United States of America. According to the Jamaica Observer, and following the meeting, Caribbean Community (CARICOM) Ministers of Finance have been “urging progress on taxing digital commerce to tackle debt”.
To that end, CARICOM Ministers appear to be of the view that
…the Commonwealth should bring its powerful collective voice to ongoing discussions at the Organisation for Economic Co-operation and Development (OECD), particularly on behalf of smaller states.
International agreement on digital taxation could enable countries to benefit by taxing large tech giants, even if they do not operate within their jurisdictions.
(Source: Jamaica Observer)
Currently, it is not clear the extent to which the Commonwealth could be prepared to broach this issue, or to lobby on CARICOM’s behalf. However, below are some initial thoughts and concerns are outlined.
1. Adding new taxes when collection/compliance is poor
In the first instance, it ought to be acknowledged that the tax collection rate, and correspondingly tax compliance, in most Caribbean countries is low, especially with respect to personal (and to a lesser degree corporate) income tax and statutory deductions. Hence, as a means of increasing tax revenues, many countries across the region have introduced some kind of sales or value-added tax, payable by consumers on goods and services purchased in-country, and collected by vendors on the government’s behalf.
However, although compliance by vendors – to remit the sales or value-added tax to government might be better – it does not obviate the fact that many Caribbean governments have not sought to address the low tax compliance that exists. However, they seem to be looking for additional taxes that can be introduced, instead of tackling the deficiencies in the current systems that they manage.
2. Provisions already exist for Imports to be taxed
In virtually all Caribbean countries, goods imported are subject to a broad range of taxes, levies and charges, regardless of how they are purchased. These taxes and charges may include import duties, consumption tax, sales tax, environmental levy/tax, to name a few, and does not include the administrative/processing and storage fees that might also be payable to Customs.
Thanks to the popularity of US-based package and mail forwarding services that deliver goods into the Caribbean region, and so allow individuals to purchase an even broader range of goods from overseas, all of those imports are subject to the already and well-established import duties and charges framework. These taxes and duties are being paid directly by consumers in order to successfully clear their goods, and is revenue for the government.
3. Taxing services or other non-physical products likely to be intrusive
Although all imports can be taxed, the argument could be made that there is a large portion of online orders that so far, are escaping the government tax basket, such as services and non-physical products that do not need to be imported. Examples of these services and products include web hosting services, and online video streaming subscriptions that are purchased online.
In governments being able to tax those products and services, questions with respect to privacy and the intrusiveness of the enquiries needed – in order to determine what was purchased, and thereafter whether it should be subject to taxes, and the rates payable – are likely to be raised. Further, in many instances, purchases are already subject to local sales taxes in the country where the vendor is located, and are paid by the purchaser. If Caribbean governments also intend to tax purchasers located in their country, essentially, purchasers may end up paying two sets of sales tax, although the vendors are not located in their home country.
4. Taxing overseas companies likely to create more problems than it solves
The solution reportedly mooted by CARICOM Finance Ministers to increase tax revenues was to tax the “large tech giants, even if they do not operate within their jurisdictions”. This posture seems similar to that of the Caribbean telecoms companies that have been lobbying for Caribbean governments to tax, or to introduce a system that would require the major over the top service providers (OTTs) to pay for access to consumers in the region.
At the time of writing, the arguments for taxing OTTs has not gained much traction, and the Finance Ministers’ proposal is similarly challenged; as:
- It sets a bad precedent
- It could result in double taxation of the companies involved, and may be precluded by already existing mutual taxation treaties and other similar frameworks
- It undermines the global marketplace that the Internet seeks to foster
- It is unlikely to get traction in the countries where these tech companies are domiciled, as it would be a loss of revenue in the countries where they are based
- It would be difficult to enforce
- It seems to be a way of penalising Caribbean consumers for accessing goods and services that either are not available, or are not available at affordable prices, locally.
5. Taxing at the expense of economic growth and development
Finally, although it is acknowledged that taxes are the primary source of revenue for most countries, which in turn is used to service debt – which was the focus of the Commonwealth Finance Ministers Meeting – it can be argued that focussing almost exclusively on direct taxation is myopic. Instead, the attention ought to be on finding ways to stimulate Caribbean economies, and creating an enabling environment for investment and innovation.
Most countries in the region have been experiencing high cost of living, which in turn affects the cost and ease of doing business. Further, unemployment and underemployment are high, and the availability of skilled labour is still low. Additionally, virtually all Caribbean countries have service-based economies, with the primary industry being tourism. However, considering the adverse weather conditions to which we are subject, along with the general fickleness of that industry, there should be a more concerted effort to diversify our economies to make them more robust.
In summary, in many Caribbean countries, consumers are already paying numerous taxes – personal income taxes and statutory deductions, sales/value-added taxes, import duties (as applicable), to name a few. Moreover, any new taxes that are introduced are most likely going to passed on to the local consumers. Instead, greater attention should be given to improving the efficiency and effectiveness of collection for already existing taxes, and to finding new and innovative ways and means of fostering economic growth and development.
Image credit: Images Money (flickr)
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Well… well… Taxation, esp of the Tech Giants, is a difficult and “delicate” topic with endless arguments and counter-arguments. I tend to support the view of taxing them. Ever heard of ( perhaps unfairly conceived term ) “Google Tax”? If Google Tax efforts are a reality, then there is genuine concern in terms of how revenue is acquired and fair tax paid for that revenue.
It is different for businesses whose gross working capital ( for eg ) is domiciled in specific countries/regions. Even if these were to divert revenue reporting onto a tax haven, the deployment of that working capital would directly result in creating economic activity which in turn results in tax ( employee pay tax and other taxes, direct and indirect ).
A large chunk of the Tech Giants’ working capital is in cyberspace!