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China and the U.S.: Unexpected bedfellows in global digital tax wars

As the U.S. prepares retaliatory measures against European and Indian digital service tax plans, it has found an unexpected ally: China. While the two nations ratchet up their tariff and currency confrontations, they have found common ground in checking a big-tech tax grab by the rest of the world.

So far, China has let the U.S. do all the saber rattling around the DST proposals from a growing list of countries. The U.S. threats against French wine or a U.K. post-Brexit free trade deal have quietly delighted China since they also serve to protect its own global digital offensive, led by the big four: Alibaba, Baidu, JD and Tencent. But the recent Chinese domestic slowdown may soon end this restraint.

China — a digital giant emerges

While the anxious European fixation around lost tax revenues has been focused on U.S. multimedia companies, China is encouraging its own homegrown digital talent to expand abroad. China is already a much larger e-commerce market than the U.S., and the largest players are looking for new markets.

Alibaba, the e-retail frontrunner in China, is bolstering its Alipay and AliExpress subsidiaries to push international payment and logistics offerings to rival the likes of PayPal and Amazon. It has purchased India’s most popular web browser, UCWeb, to provide it with the deep insights into consumer behaviors that Google pioneered through Chrome. And its consumer-to-consumer platform facsimile of eBay, Taobao, is making major inroads into Southeast Asia.

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JD, the junior Chinese digital contender, is stretching its reach beyond China too. Its Amazon-style mix of its own and third-party inventories is proving to be a hit throughout Asia. Its partnerships with Walmart and Google across the U.S. and Asia are also set to directly challenge Amazon.

It’s a similar story with Chinese social media homegrown talent. Tencent QQ, the messaging service, is now the world’s seventh most visited website and is quickly going global. Weibo, the highly profitable blogging site, already has close to half a billion users outside of China.

Chinese fiscal reticence wears thin as the economy slows and U.S. tariffs take toll

This all means that China does not welcome (any more than the U.S.) other nations attempting a tax land-grab on its national champions’ international digital success. It sees the French, British, Italian, Spanish and Indian plans for a turnover tax on sales on their residents as a flagrant breach of long-established global treaties.

To date, China has been shy about throwing its weight around on the global stage. But its own slowdown is set to reverse this back-seat policy. As the Chinese government collects over 80 percent of its income from businesses, which are on the downturn with a global recession looming, it can ill afford to have Europeans pick its fiscal pockets.

So expect the Chinese to start speaking up, starting with next year’s OECD discussions about a global solution to the digital carve-up. And the U.S. may end up wishing it’s still the lead act.

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