Chancellor urged to take a global lead on Digital Services Tax as G20 finance ministers meet

Profile picture for user slauchlan By Stuart Lauchlan October 18, 2019
Summary:
techUK urges Sajid Javid to move away from the UK's plans to go it alone on Digital Services Tax.

Image of Sajid Javid

As finance ministers from G20 countries meet in Washington, UK Chancellor Sajid Javid has been urged to take a leadership stance on the issue of a Digital Services Tax.

The UK currently intends to follow the lead set by France and impose a unilateral tax on local revenues generated by multi-national firms in the wake of anger about current practices. For example, it’s recently been announced that Facebook earned £1.6 billion in revenue in the UK, but paid only £28 million of tax to the UK Treasury.

Javid’s predecessor Phillip Hammond last year announced his intention to introduce a UK tax on firms such as Amazon and Google to come into play in 2020. Since then the Boris Johnson administration has not committed to that plan and UK trade association techUK is calling on Javid not to do so. Associate Director of Policy Vinous Ali says:

We urge the Chancellor to seek to build support for the OECD process at the G20 and position the UK as a leader in global tax reform, rather than be distracted by a UK-only Digital Services Tax that could be dead on arrival if a multi-lateral solution is emerging.

The Organization for Economic Cooperation and Development (OECD) has been working on an international plan to tackle the problem of multi-national companies not paying tax based on local sales around the globe.

It has now published a first proposal - Secretariat Proposal for a “Unified Approach” under Pillar One - which seeks to ensure that multi-nationals conducting significant business in places where they do not have an actual physical presence become liable for tax, with new rules stating where tax should be paid and on what portion of profits they should be taxed.

This is a positive start, reckons Ali:

Concerns about the taxation of multi-nationals can only be resolved through international action.The OECD proposals have the benefit of looking across the whole economy to build durable and predictable tax principles that do not single out one sector. This is vital if we are to ensure a level playing field that allows our sector to continue to flourish – creating jobs and opportunities as it does.

"This is the benefit of a multi-lateral agreement through the OECD which would help create a solution for the long term and negate the need for national or regional solutions that would complicate rather than simplify global tax compliance by multi-national companies.

techUK has long called on governments around the world to work together through the OECD to support changes to global tax rules. The fair taxation of multi-lateral is one of the great challenges of the modern economy, the proposals put forward by the OECD have the potential to update global tax rules to fit the realities of the 21st Century.

Threat

OECD Secretary-General Angel Gurría has emphasised the urgency of coming to a consensus internationally if the global digital economy is not to become bogged down by a Balkanised tax regime:

We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020.

This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all MNEs (Multi-National Enterprises) pay their fair share.

He adds:

Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy; we must not allow that to happen.

But even as G20 ministers debate the issue, another European country has announced its intention to go its own way.

Italy plans to slap a 3% of revenues tax on companies with sales of over €750 million, when at least €5.5 million come from services provided in Italy. According to budget plans submitted to the European Commission, the Italian government reckons that the new tax will pull in €600 million per annum when it’s introduced next year.

The move follows France’s decision to go it alone with its own version of a local tax, an action which enraged the Trump administration and led to Twitter threats of a tariff war on wine and cheese.

The problem is that such taxation is seen in Washington as being primarily aimed at US tech giants, such as Amazon and Google, who are currently able allocate EU tax obligations to favorable local regimes.

According to comments by US Treasury Secretary Steven Mnuchin earlier this week, there is progress being made towards a rapprochement between France and the US:

We don't yet have an agreement, but we are getting closer in that direction.

But as President Trump met with his Italian counterpart yesterday, White House officials were warning that Italy’s tax plans would meet with the same hostility as France’s had done:

[He] believes this is an unfair discrimination on US companies since they are the primary companies that would be affected by such a tax. If such targeting of US companies is done, he would have no choice but to retaliate to protect US businesses.

My take

The OECD initial proposal is welcome and worth a read. As ever on this topic, the main stumbling block is going to remain national vested interests, particularly in the US as next year’s election campaigns ramp up. The current Oval Office incumbent’s MAGA rhetoric will be bolstered by a robust defense against the EU and others trying to ‘steal’ tax dollars from US tech champions (even if he’s none too keen on those champions the rest of the time!). The 2020 goal to get a consensus deal done is a worthy ambition, but I’m not about to hold my breath.