In an increasingly digitised world, it is possible for globalised corporations to reduce or eliminate their tax liabilities on corporate profits by using sophisticated international structures. The winners are the corporations and their stakeholders. While “losers” and “winners” are relative concepts, some countries definitely feel that they are suffering reduced tax yields because of this. The base-erosion and profit-shifting (otherwise known as BEPS) used to achieve this take many forms. Over the last 20 years, BEPS has reached unprecedented levels. In 2013 the OECD began a project to combat this and has achieved many successes. Nevertheless, taxing the digital economy remains inherently difficult.
Many of the countries which are losing tax because of BEPS supported the OECD initiative. However, recognising that it would take years to agree and implement the international framework necessary to combat the more problematic aspects of BEPS, they decided to take interim measures of their own. Typically this involved the enactment of digital services taxes or online sales taxes, often with an explicit intention of repealing those taxes once the OECD initiative had taken effect.
US tech companies Facebook, Amazon, Apple, Microsoft and Alphabet’s Google, known as FAAMG, quickly found themselves on the receiving end of these tax demands. It wasn’t long before the US government entered the fray with threats of tariffs on imports from countries which were imposing digital taxes on global corporations headquartered in the USA.
In the case of the UK, where the April 2020 introduction of the digital services tax is thought to have already raised around £400 million, the USA threatened imports of British ceramics, make up, furniture and games consoles with tariffs of some $325 million.
In a move likely to exacerbate US sensitivities, the UK government has also been considering the introduction of an online sales tax to help level the playing field between high street bricks-and-mortar businesses, and their clicks-and-mortar competitors. It is widely believed that the Chancellor did nothing to progress this either on Budget Day or Tax Day in March 2021 for three reasons. First, many UK retail businesses sell both through shops and online. Second, any new tax on sales must be harmonised with the reform of business rates which is not expected to be progressed until autumn 2021. Third, US corporations and the US government might see an online sales tax as a further act of fiscal provocation.
Over a matter of weeks, the debate has moved on. US Treasury Secretary Janet Yellen has changed the mood music by asserting that “America first must never mean America alone”. The White House $2 trillion recovery plan will see an increase in the US corporate tax rate from 21 per cent to 28 per cent. The US might itself become a victim of BEPS. As a result, it is throwing its weight behind progressing the OECD BEPS initiative as well as pushing for a broader agreement on corporate taxation covering the G20 and other countries. If successful, that would lead to the repeal of many single-country digital taxes. With that might come a reduction in the use of tariffs as tactical fiscal weapons.
With the IMF and World Bank Spring meeting in Washington later this month, followed by the UK chairing the G7 meeting in Cornwall in June, and then the October G20 summit in Rome, there will be abundant opportunities for international debate and agreement. If the UK Chancellor’s calculations are correct, his decisions about business rates reform and a possible online sales tax – difficult enough as they are – could well be made against a background of less frenzied international debate.