Digital Tax Trap: IMF Warns Taxing Global Royalties Can Slow Down Technology Trade
SDG 17: Partnerships for the Goals | SDG 9: Industry, Innovation and Infrastructure
Institutions: Ministry of Finance | Ministry of Commerce and Industry
New research from the IMF titled “Shaping Services Trade: The Heterogenous Effects of Withholding Taxes” shows that when a country imposes a Withholding Tax (WHT)—a common fee on cross-border payments—it significantly slows down the trade of services, especially those involving technology and brand use. The study, based on a global dataset from 2005 to 2021, confirmed that WHTs act as a barrier to service imports.
The key finding is that not all services react the same way. Payments for royalties (fees for using intellectual property, patents, or brand names) are four times more sensitive to WHT rate changes than other fees, such as technical service charges. Since companies sometimes disguise taxable profits as high royalty payments to lower their tax bills—a practice called profit shifting—governments use WHTs to catch that revenue at the border. However, the data suggests that raising this tax rate is so effective that it also discourages genuine trade in crucial knowledge and technology.
This creates a difficult balancing act for policymakers: WHTs are essential for plugging tax loopholes and protecting the national tax base from profit shifting. However, raising WHTs too high on items like royalties risks cutting off access to the foreign technology and brand licensing needed for national economic growth and industrial competitiveness.
What is a Withholding Tax (WHT)? → It is a form of indirect tax collected by a country’s government on income paid to a non-resident. In the context of services trade, the domestic company making a payment (e.g., for royalties or technical fees) to a foreign provider must “withhold” a portion of that payment and remit it directly to its own tax authority. This mechanism ensures tax is collected at the source before money leaves the country.
Relevant Question for Policy Stakeholders: How can governments refine tax treaties and domestic WHT frameworks to distinguish between genuine technology transfer payments (which should be encouraged) and payments primarily designed for corporate tax base erosion?
Follow the full news here: Shaping Services Trade: The Heterogenous Effects of Withholding Taxes