Plans to tax digital firms have exposed deep divisions around the world. Can they be resolved or will some countries continue to feel the likes of Google and Amazon are paying only a fraction of the tax they should?
In certain countries, global digital companies like Google, Apple, Facebook and Amazon (GAFA) have for years been able to benefit legitimately from legal loopholes or regulatory differences across jurisdictions to minimise their tax bills. Although, like many other global firms, they pay substantial other corporate taxes without commentary, it’s the revenue-related taxes that most often attract critical scrutiny.
The Organization for Economic Cooperation & Development (OECD) is trying to do something about it by encouraging more than 110 countries to reach a consensus by 2020 on how best to tax digital business across international borders.
But the OECD’s own interim report, published in March 2018, highlights there are big divisions between different countries, indicating agreement is a long way off. Moreover, certain countries, including France, India and Australia, have either introduced or are said to be intent on introducing their own new tax rules, even if they are fiercely opposed by other countries, most notably the US.
This has lead to a rise in tax tensions between governments, especially EU governments and the US, while the big digital firms themselves believe they are being unfairly penalised.
Following the publication of the OECD report, the European Commission unveiled plans for an interim digital tax on the revenues earned by digital giants. A levy would be set at three per cent and could raise up to €5bn a year for Europe’s coffers from the likes of Google, Facebook, and Apple, The Financial Times reports. The interim tax would be a kind of equalisation tax on turnover generated in Europe. This idea was originally proposed by France and supported by Germany, Spain and Italy. The UK has also proposed a similar measure.
However, the plans have been met with opposition from some member states within the EU and will be fiercely opposed in the US. Online news specialist Tax-News reports that the US Treasury Secretary Steven Mnuchin has said: "The US firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to US job creation and economic growth. Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers. I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing.”
David Sayers, Head of International Tax at Mazars, a participant firm in Praxity Global Alliance, says an equalisation tax would be “unworkable” because of the nature of digitalisation and the complexities involved: “I don’t think there is a one-system-fits-all solution. So many businesses have digital elements as part of their businesses and you can’t discriminate.”
Another solution put forward is some sort of tax based on the number of users and not just where the company has a physical presence. David Sayers is equally dismissive of this idea. “How are you going to do it? They have to change the whole definition of what a digital business is … the chances are the US will look to kick this idea into the long grass”.
Why all the fuss?
The problem is that tax rules have been rendered out of date by the digital economy. There is a widely held belief that digital firms operating across international borders are unfairly paying far less taxes than companies in other industries.
The GAFA digital giants are headquartered in the US but have international operations, and employ staff, in other jurisdictions. As do many tech giants based outside the US. They make profits from users around the world but there is disagreement on where they have a sufficient presence in a country to be taxed there. There is also disagreement on how profits are allocated across borders by multinational companies.
If all this sounds a little familiar it’s because these challenges are part of the OECD’s broader, more ambitious plan to end perceived tax avoidance by multinationals – the Base Erosion and Profit Shifting (BEPS) Action Plan.
The BEPS initiative aims to prevent tax planning strategies that exploit gaps and mismatches in tax rules to shift profits artificially to low or no-tax locations where a company may have little or no economic activity. Some progress has been made but it has been patchy, with some countries implementing best practice recommendations far quicker than others.
The introduction of new tax rules for digital firms is more contentious, if recent statements from the OECD and various governments are anything to go by.
The three opposing camps
In its interim report, the OECD says there are three opposing camps:
1. Countries that consider no action is needed
2. Countries that consider there is a need for action regarding user contributions
3. Countries that consider any changes should apply to the economy more broadly
One area where agreement has been reached by members is what the OECD calls a coherent and concurrent review of “nexus” and “profit allocation” rules. These relate to the allocation of taxing rights between jurisdictions and the determination of the relevant share of the multinational enterprise’s profits that will be subject to taxation in a given jurisdiction. However, the OECD reveals “there are divergent views on how the issue should be approached”.
Some countries are calling for stronger, faster action. In particular, an excise tax on the supply of certain e-services within their jurisdiction that would apply to the gross consideration paid for the supply of such e-services. But the OECD concedes: “There is no consensus on the need for, or merits of, interim measures, with a number of countries opposed to such measures on the basis that they will give rise to risks and adverse consequences”. These consequences include negative impacts on investment, innovation and growth, the possibility of over-taxation, distortive impacts on production and increasing the economic incidence of tax on consumers and businesses.
Interim measures in Europe
The Financial Times reports stop-gap measures could involve taxing digital advertising revenues, targeting subscriber fees and money made through selling users’ personal data. However, with little agreement within the EU on the merits of implementing a digital tax, it seems unlikely these measures will be introduced any time soon, at least not EU-wide.
Italy, Germany, Spain and France, are spearheading the push for tax reform, according to Reuters. They face resistance from smaller nations like Ireland who are a hub for digital firms’ investments and fear changes could hurt their economies.
“It’s not possible, not sustainable, that we tax manufacturing industries while billions in profits earned by GAFAs on European soil evaporate,” French Finance Minister Bruno Le Maire reportedly told Reuters.
For all the OECD’s good intentions, patience is running out among some members. With international consensus on how to tax digital firms a long way off, it looks increasingly likely that countries will attempt to introduce their own tax rules. This may satisfy certain governments but it is unlikely to help in tackling the digital challenge globally.
The argument in favour of increasing taxes for digital giants at domestic level is said to be both fiscal and political. It is also influenced by public pressure. Countries keen to introduce some sort of digital tax claim that value is being generated in their jurisdiction that would otherwise go untaxed, challenging the fairness, sustainability and public acceptability of the system. It would seem a pretty sound argument.
David Sayers believes the answer is right under our noses in the form of the measures put forward to eradicate BEPS. “I think the answer is already here within the BEPS proposals, particular transfer pricing on intangibles. This means you can no longer create an entity just to hold IP. The BEPS system is up there ready to be used, it just needs to be enforced. There is a process to fix this. The UK is a keen adopter, as is France and even to a certain event the Americans.”
This may not be enough to halt some governments introducing their own measures, despite the complexities involved and doubts over their effectiveness.
What makes it harder to resolve differences to everyone’s satisfaction is that digital giants have legally done nothing wrong. They’ve just been going about their business, making the most of what are clearly now outdated international tax rules. Even if GAFA and other digital businesses face massive tax hikes in future, rethinking where and how they operate, little is likely to happen very soon. Meanwhile these firms will be free to continue to benefit from what are seen by many people as very favourable tax arrangements, much to the continued pleasure of shareholders and the frustration of certain governments.