China is the second largest digital economy High profile digital services tax

Digital tax, a tax specifically levied on effective profits generated by Internet business, has received increasing attention in recent years, and China is already the second largest producer of digital economy.

Speaking at a media conference on April 21, the day the Boao Forum for Asia ended, Zhou Xiaochuan, former governor of the Communist Party of China (CPC) central bank, emphasized the high importance the CPC attaches to the digital tax, which experts believe is both a way to avoid losses and to control the discourse in the field.

As vice chairman of the Boao Forum, Zhou Xiaochuan confirmed that the issue of digital tax will be included in the discussion topics of this year’s G20 summit, and that each country’s leaders will have to take a position on it at the summit.

Digital tax is the abbreviation of “digital service tax”, which is a tax levied on the effective profits generated by digital services (Internet business) and has received more and more attention in recent years. China is already the second largest digital economy producer.

Zhou Xiaochuan made it clear that the Chinese Communist Party’s focus on the digital tax is “not to fight over who gets the digital tax and whose pockets it goes into,” and that “fighting will easily lead to a new tariff war.

The reason for the international dispute over the digital tax

What does Zhou Xiaochuan mean by “fight”? In recent years, the United States, a major exporter of digital services, and European countries, a user of digital services, have been unable to agree on whether and how to levy a digital tax, and have even created friction. For example, Facebook, Twitter, Amazon and Google have a large number of users in Europe, but European countries are not taking any tax, because according to the current international tax rules, these large cross-border digital service companies, are only to the location of the United States tax.

In March 2018, the European Union adopted a “digital services tax proposal” but did not reach an overall agreement, and in July 2019, France took the lead in passing a bill to tax cross-border digital services companies. Fourteen European countries, including the UK, Spain and Italy, soon followed.

China’s international position on digital services

China is the second largest producer of digital economy after the U.S. In 2019, the value added of China’s digital economy amounted to 35.8 trillion yuan ($5.5 trillion), accounting for 36.2% of its GDP.

According to the United Nations Conference on Trade and Development’s “Digital Economy Report 2019,” the U.S. and China account for 75 percent of blockchain technology-related patents, 50 percent of global IoT spending, more than 75 percent of the global public cloud computing market, and 90 percent of the market value of the world’s 70 largest digital platforms, while Europe’s share of digital platforms is only 4%.

Of the seven “superplatforms” that account for 2/3 of the total market capitalization of digital platforms, the US accounts for five – Microsoft, Apple, Amazon, Google and Facebook – and China accounts for two – Tencent and Alibaba. Tencent and Alibaba.

China’s Digital Services Trade Surplus Surges

On the one hand, none of the global digital service giants such as Google, Amazon, Twitter and Facebook have been able to land in mainland China due to the Communist Party’s cyber firewall and high non-tariff barriers; but at the same time, China’s digital economy is growing rapidly and has expanded significantly overseas, and the digital trade surplus continues to grow as a percentage of China’s overall trade surplus.

According to the China Industrial Information Security Development Research Center’s 2020 “Digital Trade Development Report” released last October, China’s digital trade surplus in 2019 was 187.39 billion yuan (about $28.83 billion), an increase of up to 46.1% year-on-year. Among them, telecommunications, computer and information services trade surplus was the largest, amounting to CNY190.48 billion (about USD29.8 billion), an increase of 17.5% year-on-year.

From 2005 to 2019, China’s trade in digitizable services rose from $48.859 billion to $271.810 billion in 2019. Among them, exports have increased up to seven times, while imports have only increased three times, and trade in digitizable services has also turned from a deficit to a surplus, and the surplus is rapidly increasing.

China’s digital services imports, mainly in the patent and other intellectual property spending; and in recent years, China’s rapid development in digital applications (App) and other aspects, led to a surge in China’s overall digital exports, such as Jitterbug overseas version (TikTok), etc. In 2020, cross-border e-commerce alone, the trade value of 1.69 trillion yuan (about 260 billion U.S. dollars), an increase of up to 31.1%.

CCP wants to shape new competitive advantage

Although Zhou admitted in his speech that “China certainly has this problem,” he stressed that “it is not prominent” and that “we also have many online platforms that provide (overseas) services, but after all, the proportion is very small. “

In April last year, the Communist authorities identified the first 12 national digital service export bases. By last October, Communist Party leader Xi Jinping had proposed to accelerate China’s digital economy and actively participate in the development of international rules such as digital currency and digital taxes in order to shape a new competitive advantage for the Communist Party.

Obviously, the digital tax issue, if not solved properly, will hit all these efforts of the CCP. Therefore, Zhou Xiaochuan seemed to intentionally downplay the impact of digital tax on China’s digital export economy in his speech at this Boao Forum, saying that the digital tax issue “is a niche issue” in China “because the existing domestic tax system covers the digital industry to a large extent. “

In this regard, Shi Shan, a senior media figure on financial issues in China, believes that the inconsistent stance of the United States and European countries such as France and Britain on digital taxation, the Chinese Communist Party wants to sit back and watch the tiger fight on the one hand, and on the other hand, it is also worried that digital taxation will expose China’s own huge digital trade surplus, and may suffer losses due to the payment of huge digital taxes, and can no longer exploit the loopholes of unsound international digital tax rules. At the same time, the Chinese Communist Party also wants to control the voice of the digital sector.