Tag: retaliation

In his Budget on 29 October, the UK Chancellor, Philip Hammond, announced a new type of tax. This is a ‘digital services tax’, which, after consultation, he is planning to introduce in April 2020. The target of the tax is the profits made by major companies providing social media platforms (e.g. Facebook and Twitter), internet marketplaces (e.g. Amazon and eBay) or search engines (such as Alphabet’s Google).

Up to now, their profits have been very hard to tax because the companies operate in many countries and use accounting techniques, such as transfer pricing (see the blogs Disappearing tax revenues: how Luxembourg saves companies billions and Starbucks pays not a bean in corporation tax, thanks to transfer pricing), to declare most of their profits in low-tax countries, such as Luxembourg. One way of doing this is for a company’s branches in different countries to pay the head office (located in a tax haven) a ‘royalty’ for using the brand.

The proposed digital services tax is a 2% tax on the revenues earned by such companies in the UK. It would only apply to large companies, defined as those whose global revenue is at least £500m a year. It is expected to raise around £400m per year.

The EU is considering a similar tax at a rate of 3%. India, Pakistan, South Korea and several other countries are considering introducing digital taxes. Indeed, many countries are arguing for a worldwide agreement on such a tax. The OECD is studying the implications of the possible use of such a tax by its 36 members. If an international agreement on such a tax can be reached, a separate UK tax may not go ahead. As the Chancellor stated in his Budget speech:

In the meantime we will continue to work at the OECD and G20 to seek a globally agreed solution. And if one emerges, we will consider adopting it in place of the UK Digital Services Tax.

The proposed UK tax is a hybrid between direct and indirect taxes. Like corporation tax, a direct tax, its aim is to tax companies’ profits. But, unlike corporation tax, it would be harder for such companies to avoid. Like VAT, an indirect tax, it would be a tax on revenue, but, unlike VAT, it would be an ‘end-stage’ tax rather than a tax on value added at each stage of production. Also, it would not be a simple sales tax on companies as it would be confined to revenue (such as advertising revenue) earned from the use in the UK of search engines, social media platforms and online marketplaces. As the Chancellor said in his speech.

It is important that I emphasise that this is not an online-sales tax on goods ordered over the internet: such a tax would fall on consumers of those goods – and that is not our intention.

There is, however, a political problem for the UK in introducing such a tax. The main companies it would affect are American. It is likely that President Trump would see such taxes as a direct assault on the USA and could well threaten retaliation. As the Accountancy Age article states, ‘Dragging the UK into an acrimonious quarrel with one of its largest trading partners is perhaps not what the Chancellor intends.’ This will be especially so as the UK seeks to build new trading relationships with the USA after Brexit. As the BBC article states, ‘The chancellor will be hoping that an international agreement rides to his rescue before the UK tax has to be imposed.’

Articles

Government documents

Questions

  1. How do multinational digital companies avoid profit taxes (corporation tax in the UK)?
  2. Explain how a digital services tax would work.
  3. Why is a digital services tax likely to be set at a much lower rate than a profit tax?
  4. Explain the difference between tax avoidance and tax evasion.
  5. Would it be possible for digital companies to avoid or evade such taxes?
  6. Is there a possibility of a prisoners’ dilemma game in terms of seeking international agreement on such taxes
  7. How does a digital services tax differ from a sales revenue tax

With countries around the globe struggling to recover from recession, many seem to believe that the answer lies in a growth in exports. But how can this be achieved? A simple solution is to lower the exchange rate.

Under a pegged exchange rate, the currency could be devalued. Alternatively, if the country’s inflation is lower than that of other countries, merely leaving the exchange rate pegged at its current level will bring about a real devaluation (in purchasing-power parity terms).

Under a floating exchange rate, one answer would be to lower interest rates. This would involve open market operations to support the lower rate and that would increase the money supply. But with central banks’ interest rates at virtually zero, it is not possible to lower them further. In such circumstances a solution would be a deliberate policy of increasing the money supply through “quantitative easing”. For example, the USA is considering a second round of quantitative easing (known as “QE2”). This would tend to push down the exchange rate of the dollar.

But stimulating exports through devaluation or depreciation is a zero-sum game globally. If currency A depreciates against currency B, currency B necessarily appreciates against currency A. Country A’s gain in exports to Country B are an increase in imports for Country B. It is logically impossible for every currency in the world to depreciate! Yet depreciation is exactly the policy being pursued by countries such as Japan, South Korea and Taiwan, all of which have directly intervened in the currency markets to lower their exchange rates. And, in each case of course, other countries’ currencies have an equivalent appreciation against them.

Economists and politicians in the USA argue that the dollar is fundamentally over valued against the Chinese yuan (or ‘renminbi’ as it is sometimes called). They are calling on China to revalue by far more than the 2% increase since June 2010. But what if China refuses to do so? On 29 September the House of Representatives passed a bill giving the executive branch the authority to impose a wide range of tariffs on imports from China. The bill was passed with a huge majority of 348 to 79.

So is this the start of a trade war? Many in the USA argue that China is already waging such a war by giving subsidies to a wide range of exports. And that war is hotting up. China has just announced that it is imposing traiffs ranging from 50% to 104% on various poultry imports from the USA. And if it is a trade war, will there be any winners? The following articles investigate.

Global recovery’s weakness raises possibility of trade war Guardian, Larry Elliott (4/10/10)
Tension mounts as China and US trade insults over currency Independent, Stephen Foley (1/10/10)
Is the world in a trade war? Time Magazine blogs: The Curious Capitalist, Michael Schuman (29/9/10)
Trade War Is Here – and We’ve Disarmed The Huffington Post, Robert Kuttner (3/10/10)
US House Passes Anti-China Trade War Bill GlobalResearch.ca, Barry Grey (1/10/10)
Currencies the key to market’s next move BBC News, Jamie Robertson (3/10/10)
A Message for China New York Times (30/9/10)
Taking On China New York Times, Paul Krugman (30/9/10)
Krugman Makes Two Powerful Arguments Against “Taking on China” Wall Street Pit, Scott Sumner (2/10/10)
Why the U.S. can’t win a trade war with China The Globe and Mail (Canada), Carl Mortished (4/10/10)
China-Japan trade war looms CTV News (Canada), Mark MacKinnon (23/9/10)
IMF chief’s warning of currency war ‘real threat’ BBC News, interview with Dominique Strauss-Khan, head of the IMF (7/10/10)
Could disputes over currency levels lead to a depression? BBC World Service, interview with Robert Zoellick (8/10/10)
China stands firm over yuan move BBC News, Andrew Walker (9/10/10)
What to do about China’s currency? Washington Post (10/10/10)
How to stop a currency war The Economist (14/10/10)
What’s the currency war about? BBC News, Laurence Knight (23/10/10)
Nominally cheap or really dear? The Economist (4/11/10)

Questions

  1. Why are competitive devaluations globally a zero sum game while global trade wars are a negative sum game?
  2. What are the arguments for and against using tariffs as a means of stimulating recovery?
  3. Why has quantitative easing so far had a more discernible effect on asset prices than on the real economy?
  4. Do a search on “Smoot-Hawley Tariff Act” of 1930 and describe its impact on the global economy in the 1930s. Are there any parallels today?
  5. How is it possible for massive trade surpluses and deficits to persist and yet for individual countries’ exchange rates and overall balance of payments to be in equilibrium?
  6. Are global trade imbalances widening, and if so why?
  7. What would determine the size of the effect on the US balance of trade of an appreciation of the yuan?