There was a time when most people’s interest in tax changes was limited to the effect of the latest Budget on the price of fuel, drinks and tobacco. It may be hard to believe, but in those days people would queue up at petrol stations on the morning of the Budget to fill up their tanks ahead of inevitable tax increases.
How times have changed. While the “sin taxes” periodically attract media attention, the big tax issues have shifted from the High Street and fuel pumps to global, cross-border e-commerce. With at least £900bn of cross-border e-commerce expected globally by 2020, the taxation of tech companies has been exercising tax authorities around the globe. The concern of course is that, by careful use of tax structures, big tech companies can enjoy a significant competitive advantage over local businesses while contributing relatively little to domestic fiscal authorities.
The taxation of big tech needs to move out of the nineteenth century and into the twenty-first. That’s easier said than done. In a perfect world, it might perhaps be possible for nations and their tax authorities to agree a consistent, global basis for taxing the digital economy effectively, fairly and commercially. The world we have, however, is far from perfect. So far, disparate national interests mean that the OECD, G20, G7 and the EU have all failed to secure agreement from their members as to what a global digital services tax might look like. While there is still some prospect that the OECD will eventually succeed in developing a viable set of tax principles for the digital economy, that’s unlikely to happen any time soon.
In the absence of international agreement, some countries have been doing their own thing, developing and imposing local taxes on cross-border digital services. In addition to boosting local tax collection, this plays well for domestic political purposes. The list includes:
- New Zealand;
- Russia; and
- United Kingdom.
The new, retroactive French digital services tax was voted into force on 11 July 2019. From 1 January 2019 it will charge tax at 3 per cent on the revenues of tech companies which have a global turnover of more than €750m, and €25m in France. American companies Alphabet (Google), Amazon, Apple, and Facebook will be affected, along with companies from China, France, Germany, Spain and the UK.
Almost immediately, US Treasury representative Robert Lightizer was instructed to launch an enquiry into the operation of the French tax. If it is found to be prejudicial to the interests of American companies, tariffs will be imposed on the import of French goods into the USA; possibly in a targeted manner in a similar way to the EU’s imposition of additional tariffs on US goods in retaliation for the additional tariffs imposed on steel by the US. This is what I mean by the weaponisation of taxes.
It’s also worth noting that this is the same Robert Lightizer who is overseeing the US side of the negotiations with the UK for a potential future trade agreement once the UK leaves the EU.
Apparently undeterred by the prospect of tariffs on UK exports to the US, on 11 July the UK published its own proposals for a very similar digital services tax, taking force from 2020 at a rate of 2 per cent on the revenues of digital companies with global turnover in excess of £500m and UK turnover of £25m or more.
As Jesse Norman, UK Paymaster General and Financial Secretary to the Treasury, said:
the UK has always sought to lead in finding an international solution to taxing the digital economy. This targeted and proportionate digital services tax is designed to keep our tax system in this area both fair and competitive, pending a longer-term international settlement."
Such statements are set to inflame US sentiment where the mood seems to be strongly in favour of imposing tariffs on selected French imports, and those from the EU also within the next year. It seems probable that these tariffs will be accompanied by threats to impose similar tariffs on all imports from France and ultimately the remainder of the EU (including the UK) unless the countries introducing new digital services taxes back down. There is an irony, of course, that the same big tech companies which are the object of the digital services tax are already falling out of favour in Washington.
While there is a widely held view in the tax community that single-country digital services taxes should be regarded as temporary measures only, to be repealed once an OECD initiative has been implemented, the reality is that businesses and consumers in the affected countries will be caught in the crossfire of a tax war.