We are all left disgruntled by the regular stories about global technology companies paying much less tax than their counterparts with traditional businesses; despite making huge profits in the UK. Given the enormous cost of the COVID-19 response and recovery, every opportunity must be taken to bolster our country’s bank account.
A large part of the problem is that these companies can, rightly, argue that they are paying all the tax legally required by our tax laws. They are not behaving illegally. They are simply using our tax regulations to their best advantage by having their headquarters’ registered address in a more financially favourable country. This may be legal, but most people do not consider it to be fair.
It is not just the UK that is beginning to see the necessity for changes in the way that digital service providers are taxed. And this is provoking a negative response from the American government, as most of these multinationals are American companies, like Amazon, Google and Facebook. This has led to the financial threat of tariffs on goods from those countries that seek to impose a digital tax. America have also lost a great deal during the Corona Virus crisis and seek to protect the revenue of their largest companies.
What difference would a digital services tax make?
The idea is that companies who sell online services are taxed in the country where they make their sales, not just where there headquarters is registered (as it is now). This would mean increased business tax revenues and a rectification of the current unfair system.
Has anyone imposed a digital tax yet?
France decided on a 3% tax on digital services sales last year.
In response, the USA threatened France with up to 100% import tariffs on goods valued at £1.9 billion. This included luxury items like champagne and cheeses. The American government came to this conclusion after investigating the situation and deciding that the French policy was “discriminatory” against American companies.
The French government have decided not to start collecting this new tax until 2021. Therefore the USA have not enacted this threat.
Current American investigation
The ‘301 investigation’ was announced on the second of June. It is an American investigation into ten countries and groups of countries: UK, EU, Austria, Brazil, the Czech Republic, India, Indonesia, Italy, Turkey and Spain. All of these countries are starting or considering similar digital tax regulations.
Robert Lighthizer, US Trade Representative, said in a statement: “President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies. We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”
This means that unilateral tariffs could be imposed on each country, if they tax American digital services companies.
Their preference is to keep any digital tax rules as a voluntary option for American companies.
What do HMRC make of this?
An HMRC spokesperson summarised the department’s take on the situation: “Our Digital Services Tax ensures that digital businesses pay tax in the UK that reflects the value they derive from UK users, and is compatible with the UK’s international obligations. We have always been clear that our preference is for a global solution to the tax challenges posed by digitalisation and we’ll continue to work with the US and other international partners to achieve that objective.”
The second point means that such digital taxes could dropped as part of a broader agreement.
Another possible solution
The Organisation for Economic Cooperation and Development (OECD) is working on plans to unite countries under one set of digital tax rules that apply across the board. Every country that signs up to this deal will agree on one way to tax companies supplying digital services.
The OECD is due to present a plan by the end of this year. France has said that if international talks fail, tech firms will still have to pay the tax. They are due to reveal their plan by the end of 2020.