Return of the US to global governance? OECD digital tax.

Discussion about the global taxation of firms has become increasingly controversial. One aspect of this has been the digital economy. Given that it is common for digital firms to operate at distance and outside the territory of consumers, this poses challenges for how taxes are defined and collected.

Smaller and less powerful countries often face specific tax challenges, with the digital economy more dominated by foreign firms. Digital tax has also become a more significant issue as a result of the COVID-19 pandemic driving growth in the digital economy. Governments see risks in such shifts – reducing the national tax base away from local firms towards remote ones outside their jurisdiction.

Before the crisis, we already saw European countries (such as UK, France and Turkey) implementing “digital service” taxes. Over the last six months, a broader range of countries have begun to adopt similar rules (see image below), most notably a group of emerging South Asian countries – Indonesia, Cambodia, Vietnam, Thailand, Philippines and Malaysia.

In this region, nations are looking to implement a tax on foreign digital companies as well as better track platform e-commerce sellers for VAT and tax purposes.

The OECD has become the major global forum for discussing these issues with proposals from 2013 onwards. Until recently lack of progress related to US opposition under the Trump presidency; the US position was that digital tax initiatives would have a discriminatory impact on US-based tech firms who are by far the most successful in terms of global reach.

The lack of progress at the OECD led to countries unilaterally implementing digital taxation schemes, such as those mentioned above. This has come even in the context of strong political pressure to stop unilateral activity. For example, UK and France have been publicly warned of trade reprisals by senior US officials and a US “Special 301” investigation on trade barriers in European countries remains in progress.

Following pronouncements of President Biden towards renewed international engagement, there has now been confirmation that the US will support the “two pillars” of the OECD tax rules.

These pillars – a minimum global corporate tax rate for multinationals; and taxation of profits based on the location of customers – are the foundations of reformed tax rules in the digital sphere. Nevertheless, Biden’s team will likely still push for rules that reduce the overall impact on US tech firms in negotiations.

Examining emergent digital tax rules in different countries reveals a diversity of agendas in this domain. For example, implementations in South East Asia push rules on taxing foreign platforms and making e-commerce trade more legible, which might be less discussed at the OECD.

The potential for agreement on OECD tax rules is an important step forward on tax. But given US power and the corporate pressure negotiators will face, close attention will be needed to ensure it does not water-down impact for countries outside the US.

New forms of governance? UN Digital cooperation

The “UN High-Level Panel on Digital Cooperation” was launched by the UN secretary-general in 2018 to examine global cooperation and trust in the digital sphere, with a focus on the SDGs. The panel was chaired by Jack Ma and Melinda Gates with the panel reporting in 2019.

Many of the actions of the Panel were relatively uncontroversial with calls for the UN to renew engagement in key areas such as human rights online, cybersecurity and building digital capacity.

As the panel report has moved into implementation, a more controversial focus has been on implementing updates to UN governance mechanisms for digital. In particular, it was suggested that a “new strategic multistakeholder high-level body” would be formed that would coordinate steps forward.

This goal aligns to the critique that the UN has failed to have a strong policy influence in the digital arena (unlike say OECD on digital tax and WTO on digital trade). The UN does convene important multi-stakeholder bodies such as the IGF (internet governance forum), but so far these have had limited policy making power.

A “high-level body” as a way to push policy making functions within the UN has provoked unease amongst civil society actors. A particular fear is that this effort will move focus away from the multistakeholder and inclusive spaces such as the IGF and WSIS.

Rather than look to reform these more open spaces towards a policy function, the “high-level body” proposal suggests less open mechanisms of discussion, with fears of capture by corporate agendas.

This unease cumulated in a letter written by the JustNet Coalition made up of 170 civil society groups in March 2021 that articulated these fears. “What we are most concerned about here is the completely unacceptable over-reach”.

The letter continues to suggest that the UN should “immediately withdraw the proposal for a High-level Multistakeholder Body, since it would become the de facto body for ‘global digital governance’ “.

Platforms as governors? Apple’s new tracking rules

IDFA (Identifier for Advertisers) is an interface that allows tracking of Apple users across different sites and apps. As part of their focus towards privacy, Apple has recently implemented new rules that resulted in consumers being alerted to this type of tracking and having to opt-in. It is expected that the majority will opt out.

What is interesting is that this seemingly small decision by Apple promises to have spillover impacts across a whole ecosystem of digital organisations. Apple has argued that this change is important to reduce the impacts of questionable tracking behaviour, particularly by third-party ad networks.

There are suggestions, however, that it will unevenly impact smaller firms. Dynamic online sellers and digital marketing firms often look towards marketing-led and a niche focus, using targeting mechanisms such as IDFA to profile customers. Such firms claim that changes will impact their business models.

There have also been suggestions that Apple’s goal of improving security and tracking may not be the main agenda. Associations of small firms involved in the digital economy (in France, Spain and Germany) have argued that this change should be seen as anti-competitive. This is simply a dominant digital firm using its platform power to push users towards new Apple marketing products and ad platforms.

Whichever side one sits towards these arguments, this development illustrates how large firms have significant governance power across (international) ecosystems of firms. We might see such rules in parallel with other frameworks that look to regulate the data economy such as data protection rules.

Emerging data protections rules provide important new protections on data, but with their drawn-out processes of litigation and many grey areas, there is evidence that they have a limited impact, with major power remaining within decisions by large tech firms and their implementations of data tracking systems.

In the run-up to the Apple changes, we also saw an attempt by China to define a publicly supported standard called CAID. This would look to standardise tracking activities across platforms, reducing dependency of single platform firms. In China this was being developed by digital giants such as ByteDance and Tencent amongst others.

This initiative has so far been rebuffed. Apple warned Chinese firms that such implementations would be outside their terms of service and their apps would be taken off the Apple store. There is the potential for this to become an area of significant tensions between China and Apple in the future.

Digital profiling and data are at the heart of business models in the digital economy. Therefore, regulation of such activities will be important to consider further. This is particularly true as new data initiatives on the horizon promise similar conflicts (such as new standards for web cookies, and how Google and Facebook respond to Apple’s new rules).

Clearly, these have a global impact. But there is little understanding or clear consensus of how rulemaking might be evolved.

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RCEP agreement

The RCEP (Regional Comprehensive Economic Partnership) draft was signed earlier in the month incorporating 15 Asian-Pacific nations into a new trade agreement (Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, the Republic of Korea, Singapore, Thailand and Vietnam).

RCEP includes a full e-commerce chapter. The chapter text can be found on the Australian department of trade site. The e-commerce chapter is quite extensive, with clauses mainly focussing on supporting the environment for E-commerce and supporting digital trade facilitation. This makes sense in supporting the emergence of cross-border trade where a number of the countries involved are still in the process of setting up regulation in this area.

The e-commerce chapter includes clauses on three more debated issues, customs on electronic transmission, data localisation and cross-border transfers, but all are relatively broadly defined, ensuring that signatories have policy space within these areas.

• For custom duties, the agreement is defined in terms of the parallel WTO discussion on this issue. As all signatories are already WTO members, this clause only reaffirms previous agreements and effectively delegates future agendas in this area to WTO negotiations.
• On data localisation, signatories agree not to require data localisation, but the article includes clauses that allow such rules to be put in place for reasons of “security and confidentiality of communications” and “legitimate public policy objectives”. In addition, for a number of developing countries – Cambodia, Lao, Myanmar and Vietnam – these rules are delayed. Overall, this article therefore suggests a desire to reduce data localisation, but with weak binding rules in this area
• The cross-border transfers article follows similar wording to the one on data localisation, with security and public policy clauses. Bearing in mind signatory countries such as China and Indonesia have rules that already restrict certain cross-border data transfers, it can be assumed that this rule is likely to have relatively weak enforceability.

Commentators who have been pushing for binding global digital trade rules, expressed disappointment with RCEP in terms of it being relatively weak, with some suggestions that this was a success for China in setting multilateral agendas.

But it may be that the approach to digital trade in this agreement is most appropriate. This is particularly the case where the agreement includes a number of smaller nations where digital economies are still in their infancy. It provides clear direction and frameworks towards regional e-commerce but without forcing nations into broad binding rules where the implications are not yet clear.

UK-Japan agreement

The UK-Japan agreement is the first of a number of major bilateral agreements to be struck by the UK as it leaves the EU and is likely to signal the UK directions going forward.

If RCEP is relatively weak agreement in terms of digital trade then the UK-Japan e-commerce chapter is far stronger. It includes all the major digital trade rules including rules preventing custom duties, source code/algorithm requirements, prior authorisation, cross-border flows and data localisation. Given the UK position on open trade, this is not unexpected. It looks likely that the UK will become one of the stronger advocates for global agreements on open digital trade in the coming years.

Key critiques about digital trade in this agreement have most strongly focussed on the lack of transparency in the process, with very little scrutiny or discussion on what these rules might mean for firms in the UK . The implications of free flows of data is particularly concerning, given that the UK is seeking an “adequacy” ruling within the EU GDPR and the potential costs of not achieving this are significant.

It remains unclear how having a free flows agreement with Japan will work alongside the requirements of ‘adequacy’ with the EU GDPR. Some commentary has gone further, suggesting that where multiple agreements lead to overlapping data flow rules there are risks to data privacy and potential for ‘data laundering’.

Apps blocking

Discussions around state banning/blocking of apps continue. The Indian Electronics and Information Technology ministry has expanded the number of Chinese apps that it has blocked. This round included a number of important Chinese business apps including Alibaba’s AliExpress app, and business communication app Dingtalk. Such exclusions are likely to be impactful on cross-border trade between India and China if the ban remains in place in the longer term.

Meanwhile in the US, ByteDance has had a number of extensions to its deadline as it looks to resolves US concerns around social media app Tik-tok under threats that it be banned in the US. Originally Bytedance proposed a partnership with Oracle as an attempt to meet requirements, but it is unclear if this was sufficient to satisfy the US administration. Adding to the complexity, the issue appears to have gone off the agenda during the election crisis in the US. At the moment ByteDance has been given another weeks extension, and it is unclear how this issue will be resolved during the transition between Trump and Biden.

The broader point here is that how these cases are resolved is likely to be important in terms of directions of digital trade. With two of the largest countries enforcing app bans (and China in addition controlling domestic apps stores), fundamental question need to be asked about the viability of rules enforcing open digital trade in other countries. This case also suggests the need for further discussions on how to differentiate between actions that are associated with national security and those linked to economic goals.

EU data flows after Schrems II

The successful “Schrems II” case was brought by privacy campaigner Max Schrems at the European Court of Justice earlier in the year. It looked at the legal validity of EU-US data flows. One of the outcomes of the successful case was the invalidation of so-called “standard contractual clauses” (SCC), an important mechanism which enables data flows outside the EU. The courts judgement suggested that the SCC did not provide sufficient protection for EU cross-border transfers to the US and in response, the EU has revised the SCC.

The discussion on SCCs, an obscure contracting mechanism, are difficult to follow for those from outside a law background, but the implications are significant. The SCC is an approach that allows firms to transfer EU data across borders even where countries have not reached EU adequacy rules. It is also the way that many US multinationals have enabled cross-border data flows from the EU. If the old SCC were already a challenge for medium-to-small firms to implement, according to commentators the new SCC is even more onerous, if not unachievable.

The major focus of discussion has been on SCC in terms of EU-US data flows which was part of the Schrems case. However, firms across the globe with ambitions to engage with EU consumers are likely to be looking to this ruling. These changes add futher significant barriers to accessing EU data. It will be interesting to see how countries deal with these changes, particularly in regions that have ambitions to become outsourcers of EU data, suppliers of e-commerce or integrated in EU business processes.

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