The International Monetary Fund is wading into a thorny debate over whether online giants such as Facebook Inc. and Amazon.com Inc. pay enough taxes.
Some digital industries are prone to become monopolies, because the first company that establishes a technology often becomes dominant, the IMF said in an analysis released Thursday. The question of how to tax the incomes of companies such as Facebook, Amazon, Apple Inc. and Alphabet Inc.’s Google unit has become a “contentious and urgent issue,” the fund said.
“The resulting market distortions are best addressed through regulatory rather than tax measures. However, in their absence, the high profit generated provides an attractive tax base, especially given that some technology giants are among the largest companies in the world,” the fund said in the analysis its semi-annual Fiscal Monitor. The full report will be released April 18 at the IMF’s spring meetings in Washington.
The U.S. president has suggested tech companies should pay more tax. “I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments,” President Donald Trump wrote in a Twitter message last month.
The “first wave” of research on the subject recommended against taxing digital companies in a special way, the IMF noted. But calls have been growing to make tech firms pay a bigger share, with the European Union planning a new levy on companies such as Google and Facebook that route their EU profits through low-tax countries.
The tax push adds to the headaches for Facebook CEO Mark Zuckerberg, who was questioned in Congress this week on the social network’s data practices, after information from as many as 87 million users was siphoned to a firm with ties to Trump’s 2016 campaign.
Digital companies rely on intangible assets such as software algorithms, the IMF said. Taxing such assets can be challenging, given the ease with which companies can locate them in low-tax jurisdictions, the fund said.
Under international tax rules, firms only pay corporate income taxes when they have a physical presence in a country -- a rule some tech companies can skirt because they may have little or no physical presence in a country even though they sell services to its citizens, the IMF said.
Any effort to tax digital transactions should be “internationally coordinated,” the IMF said. Among other things, policy makers will need to decide which principles to use in taxing online companies, such as having companies pay taxes in the nations where their users reside, it said.
In the same report, the IMF warned that countries ramping up the use of digital tools to make their governments more efficient need to guard against the risk of fraud and privacy breaches.