The world’s leading digital businesses face big tax increases as the government looks to fundamentally alter how they’re taxed.
Financial secretary to the Treasury Mel Stride told the BBC that “social media platforms, online marketplaces, internet search engines” need to pay their “fair” share of tax. In the interim, Stride explained, a new tax on revenues is the “potentially preferred option”.
This isn’t a brand new proposal. The Treasury’s ‘Corporate tax and the digital economy’ position paper, released in November last year alongside the Budget, stated a tax on revenues that “these businesses derive from the UK market” is an option “pending reform of the international framework”.
Stride stressed in the BBC interview that, “We're not talking about tax avoidance, evasion or non-compliance, we're talking about the way the system works.” The system Stride referred to is the source of much political (and often populist) anguish.
Digital business like Google and Facebook move profits derived from the UK to lower tax countries such as Ireland or Luxembourg. It’s created a significant disparity between UK revenues and the actual tax paid to HMRC.
Facebook, for instance, paid £2.6m of UK corporation tax on revenues of £842.4m in 2016, while Google, which recorded £1bn of revenues in Britain in 2015-16, paid tax of £25.1m. The online retail giant Amazon’s warehouse and logistics division was actually owed money by HMRC, despite generating over £1bn of revenue in 2016.
If the government opened up these sales to HMRC, it would lead to a chunky increase in these companies tax bills. But there are, of course, a few snags. Stride himself acknowledged any changes to business taxation mustn’t harm smaller startups or companies struggling to turn a profit.
Arguably the bigger hurdle, however, is the international coordination required to effectively implement a tax on revenues. The EU’s VAT directive prohibits member states from applying additional turnover taxes.
So as long as the UK is part of the EU, it cannot apply a new tax on revenues unless the other 27 members unanimously agree to revise the VAT directive. That’s not to say there is no political will for a tax on revenues in the EU, however.
In a recent speech, Pierre Moscovici, the EU commissioner for taxation and customs, noted, “What is visible here is a deep schism between where digital profits are generated and where they are taxed (if at all).”
A recent draft report from the European Commission outlined a plan to tax digital companies’ gross revenues at rates between 1 and 5 percent, based on where their users are located and how much advertising revenue they bring in.
The Commission acknowledged, like the Treasury, that the interim measure was necessary to stop members from taking “unilateral action” on the matter. But it’s not a foregone conclusion; low tax countries like Ireland and Luxembourg are likely to push back on any attempt to implement this new ‘digital tax’.
Any digital tax reform would also ratchet up the existing tension between the EU and the USA over tax matters. Commenting on the UK and the EU’s plans, The OECD’s director of tax policy Pascal Saint-Amains warned “unilateral measures may trigger some form of tax wars”.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.