The World Trade Organization (WTO) moratorium on customs duties on electronic transmissions, in force for over two decades, is for review early next year, with a few countries questioning the further extension of its suspension.
The moratorium on customs duties on electronic transmissions (ETs) is not permanent and normally extended at two-year intervals ever since WTO members agreed in 1998 not to impose customs duties on such transmissions.
The last extension was in June 2022 and due to lapse at the 13th WTO Ministerial Conference in February 2024, unless WTO members decide to make it permanent or temporarily extend it until the following Ministerial Conference.
Although the term “electronic transmissions” is not defined, it is understood as trade delivered electronically, and encompasses anything from software, emails, and text messages to digital music, movies and video games, and blueprints for additive manufacturing.
Some WTO members, such as India, Indonesia, and South Africa, have argued the moratorium should be reconsidered to allow developing countries to determine the tax base for fiscal revenues, support domestic industries, and pursue other regulatory objectives.
Others, including the European Union and G-7 countries, say a permanent moratorium is needed to reduce trade policy uncertainty in the affected industries.
Many developing countries have not formulated an explicit position, according to a recent paper by the International Monetary Fund (IMF).
WTO members who have expressed reservations are concerned primarily with forgone customs revenues. While they noted that digitalization has wide-ranging benefits, it also creates tax policy challenges.
Digitalization has led to growing concerns about tax base erosion, profit shifting, and the resulting distribution of corporate tax bases across jurisdictions, said the IMF paper.
In addition, digitalization poses a challenge for recording and administering domestic taxeson cross-border transactions in digital services and e-commerce, and it has income tax implications arising from increased cross-border telecommuting.
The IMF policy note, however, argued that instead of customs duties, “broad-based nondiscriminatory value-added taxes (VAT)” are preferable in terms of economic efficiency and revenue generation, and are also easier to implement and administer.
“The WTO moratorium on customs duties on electronic transmission can help to effectively channel developing countries’ tax reform efforts in a more efficient direction,” the IMF said.
The Organization for Economic Co-operation and Development (OECD) in a September 2023 working paper also saw benefits outweighing disadvantages in a moratorium extension.
“Estimates of the potential fiscal implications of the moratorium suggest that potential customs revenue losses, including from replacement of trade in ‘digitizable goods’ with their digital equivalent, would be small and could be offset through VAT/GST revenue,” the OECD said.
The International Chamber of Commerce (ICC) and the International Trade Centre (ITC) in a joint policy brief in April 2023 noted that overall government revenue from customs duties on electronic transmission is low, and forgone customs revenue are concentrated in a small number of countries.
The paper added that instead of looking only at potential forgone revenue, this loss has to be weighed against the collateral costs of imposing customs duties.
These collateral costs include:
• The cost borne by consumers in importing countries, including the small producers that rely on digital transmissions for the survival and growth of their businesses
• The harm to providers of digital products and services, which are increasingly located in developing countries and would see their growth potential curtailed
• The negative effect on jobs, as employment in some digitally enabled services grew by about 8 percent a year in low-income countries, compared with less than 4 percent in manufacturing and 2 percent in agriculture
• The high administrative costs of levying, assessing, and auditing customs duties on electronic transmissions, which will erode the value of any revenue collected
• The uncertainty generated by a non-permanent moratorium, which is bound to deter investment, with detrimental impacts on innovation and economic growth.
“The collateral costs are considerable and compelling, as free digital transmissions contribute to business productivity, innovation, national competitiveness, and, ultimately, jobs. This is what is really at stake,”the ICC-ITC joint paper pointed out.
The paper also included the sentiments of some companies. Martin Perez, founder and CEO of Petchef said: “Governments thinking of taxing digital transmissions create uncertainty, which makes companies like mine less willing to innovate and puts my business at risk.”
“Not making the moratorium permanent damages entrepreneurship, particularly small businesses and those led by young people, which are disrupting established models and driving growth,” said Victoria Alonso Perez, founder and CEO of Chipsafer.
