The G7, which brings together representatives of the governments of Germany, France, Italy, the United Kingdom, Canada, Japan and the United States, has revived discussions on global tax reform, which aims to tax the profits of multinational companies at a minimum rate of 15%. The bill is yet to be submitted to the G20, but it has a good chance of being approved.
This reminds us of the three great economic revolutions the world went through. Between the 15th and 17th centuries, wealth belonged to those who owned land. Not surprisingly, Europe was the protagonist of the age of expeditions, seeking out new territories to explore. In the 18th century, we entered the era of the industrial revolution, where wealth passed into the hands of those who owned the means of production. The focus was on large-scale production of manufactured goods.
However, in the 21st century we live in a new reality. Today, wealth belongs to those who have a large volume of data. It is those who collect, process and manipulate it who hold the power. Therefore, the proposal for global taxation is of great concern to technology giants, who often take advantage of tax havens.
Today, the Big Techs basically concentrate the profits of all their business units around the world in countries with low or no taxation, such as Switzerland, Luxembourg and Ireland. In this way, the countries where the profits are generated miss out on billions in taxes.
According to simulations by the European Union’s Tax Observatory, approval of the 15% rate could generate extra tax revenue of more than €48.3 billion for the European Union; €40.7 billion for the United States; and €900 million a year for Brazil, the equivalent of R$5.58 billion.
The proposal seems quite appropriate for the current economic climate. It is worth remembering that in the past, when we were experiencing the era of globalization and the exponential increase in exports, tax neutrality was established, where products that were exported remained tax-free. It is only when they arrive in the country of destination that they are taxed through the nationalization of the product. This is why many of the products that Brazil exports have lower prices than those sold on the domestic market. This means that the importing country’s tax burden is generally lower than ours.
When it comes to exporting and importing products, we have a physical barrier, customs. When goods arrive at a port, they are checked and taxed there.
However, another major challenge these days is the inspection and taxation of services. Currently, there is no clear rule as to whether taxes should be paid at the place of origin of the company providing the service or at the place where the service is taken. Municipalities, states and nations have their own rules, which often lead to double taxation or even tax evasion.
In the age of digitalization, a company can provide services to individuals or companies anywhere in the world. The concept of a geographical barrier simply no longer exists. And payments for these services can take place through means that are undetectable by central bank rules, such as the use of crypto-assets, which have little or no regulation by governments.
Added to this are the changes in the very legal concept of the definition of services. According to civil law doctrine, based on Roman law, a service is considered an “obligation to do”. In this way, a human effort is presumed, whether a material or immaterial activity. Taxation uses the idea of intangibility as a criterion for classifying goods, dividing them into tangible and intangible goods, given their physical inexistence.
However, with the technological revolution, new paradigms are being broken in the law, including the change in the concept of service for the purposes of taxation by the Tax on Services of Any Nature – ISSQN, in which a service is considered to be the provision of a utility for others.
This movement culminated in Convention 106/2017, which created the concept of “digital merchandise”, authorizing the institution of ICMS on “operations with digital goods and merchandise”, such as software, programs, electronic games, applications, electronic files and the like, which are standardized, even if they have been or may be adapted, sold by means of electronic data transfer”.
Between the ISS, a municipal tax whose maximum rate is 5%, and the ICMS, whose modal rate is 18%, taxpayers are obviously in favor of the former. This is why the creation of a new global guideline is so necessary, in order to establish rules that meet society’s current demands.
In addition, the change in the concept of service, coupled with technological advances, allows both the import and export of services to practically all parts of the world and this type of business poses challenges for the tax area, mainly to avoid double taxation, which would occur if the service provider and the service taker were taxed separately in their countries. This challenge is very similar to that of income tax.
There is no denying that there is a growing difficulty in the fiscal control of service provision operations and a growing concern on the part of countries to establish taxation rules, whether to tax the service provider (exporter) or the service taker (importer).
One possible model is shared taxation between service provider and service taker countries, with most of the tax remaining at the service provider’s address, which is where the wealth is being generated.
Although this is not possible in Brazil under existing legislation, it is necessary to think about progressive and essential ISSQN import or export rates. For example, health, education and communication services should be taxed less. On the other hand, less essential services, such as entertainment, could be taxed at a higher rate, up to the 15% indicated in the proposal.
Overall, the discussion is pertinent and extremely relevant. We are facing an important tax decision, and it is up to public, private and academic institutions in each country to foster dialogue on the proposal.
The world is no longer physical but digital/virtual. In law, first we have the fact and then the tax. There is a social change and then legislation is created about it. Taxation can only take place once there is social and economic stability in the facts, and the world’s technological reality has already been more than established.
Article published on the Monitor Mercantil portal
