UK's Digital Services Tax plans called into question at home and in the US

Stuart Lauchlan Profile picture for user slauchlan October 31, 2018
Summary:
Joined up government? Not in UK circles it seems, while over the Pond US sabres are rattling...

Margot James UK Digital Minister
In the loop?

Want an indicator of how well thought through the UK Government’s plan to impose a unilateral Digital Sales Tax on US tech firms is?

Look no further than an exchange in the House of Commons this morning where the country’s Digital Minister was asked if the planned tax was in fact letting tech firms off the hook. The response from Margot James MP - who is I repeat the UK’s Digital Minister - was:

The Minister, ie me, has had no discussions with the Treasury on that matter.

What? Is this an admission that the Chancellor has picked a fight with the very digital giants that the Department of Digital, Culture, Media and Sport (DCMS) is trying to engage with to expand in the UK and hasn’t consulted with the Digital Minister? Surely not?

Then again James sounded less than on top of the brief here when she said:

My understanding of what the Chancellor announced in the Budget on Monday would be that he would be introducing a Digital Sales Tax approximating to 2% of digital turnover.

But the Minister did rally to the party line, declaring:

Other countries are planning to take action. No country has yet taken action. Therefore I would suggest that the UK is taking the lead on this.

Possibly so, but whether it’s leading in the right direction remains to be seen. Certainly there was plenty of scepticism among James fellow legislators in the post-Budget debates. Meg Hillier, Chair of the powerful Public Accounts Committee, said:

The big question…is whether it will deliver a result. If it only levies up to £400 million, as I think the Chancellor said, it will not recover the tax that some of the big tech giants have avoided through their complex multinational tax arrangements.

Conservative MP Nigel Mills said tax avoidance was a major concern so gave a “cautious welcome” to the UK going it alone, but added:

However, I share the concern of others about exactly how we can make it work—how we can define income so that we catch the companies that we want to catch, without catching the online sales of high street businesses such as Tesco or John Lewis. I appreciate the commitment not to do that, but I think it is quite hard to get the definitions right and actually get money out of those global businesses.

Labour MP Jim McMahon displayed no caution in his reaction:

This Digital Sales Tax being proposed is an absolute con.

Over the Pond

Meanwhile in the US, the reaction to the UK plans has been universally unfavorable. Tom Donohue, CEO of the US Chamber of Commerce, stated:

We understand there is disagreement at the EU level about the best way to proceed, and that in the absence of action in Brussels, individual European countries are actively contemplating adoption of their own measures.  In particular, Spain has included a provision in a budget package under consideration, and the United Kingdom has announced its intent to introduce such a measure in 2020.

Our concerns about these measures are straightforward.  First, proposing to tax revenues ignores the costs associated with sales.  Such a turnover tax dissuades investment and discourages innovation and entrepreneurship.

Second, these measures improperly target large American technology companies.  Proponents have not been shy about their intentions in this regard.  Targeting specific companies or sectors would set a dangerous precedent.  In addition, “digitally enabled services” is not clearly defined in such measures and risks encompassing an even larger pool of companies.

Finally, proponents have billed such measures as temporary solutions until an international consensus is achieved.  To the extent European countries are seeking to generate revenues under the guise of promoting “fair taxation,” it is hard to imagine these taxes being lifted once such an agreement is reached.  Moreover, adoption of a DST by one or more member states could prompt similar measures in others.

Donohue called on US Treasury Secretary Steven Mnuchin, who has previously expressed his opposition to wider EU efforts to introduce a pan-European digital tax, to take action:

The American business community supports international dialogue on ways to modernize the international taxation system to adapt to changes in the global economy.  However, unilateral European actions will erode trust and lessen the prospects for international agreement; indeed, we now see governments outside of Europe considering similar actions.

We encourage you and other members of the Administration to reiterate US concerns about any such unilateral moves, and urge your European counterparts to collaborate on consensus measures that respond to taxation concerns without punitively targeting American firms in the process.

From a political perspective, Republican Congressman Kevin Brady, Chairman of the House of Representatives Ways and Means Committee, slammed the UK’s proposals as unfair to US firms:

The United Kingdom’s introduction of a new tax targeting cross-border digital services — which mirrors a similar proposal under consideration in the European Union — is troubling. Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab. If the United Kingdom or other countries proceed, that will prompt a review of our US tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets.

And with the UK keen to secure a post-Brexit trade agreement with the US, there was a warning shot fired across the British bows from the National Foreign Trade Council (NFTC) President Rufus Yerxa, who said:

The NFTC is concerned that the concept of a Digital Services Tax threatens to undermine the long-held principle of permanent establishment that underpins worldwide taxation policies and is reflected in US bilateral tax treaties, and is a cornerstone of the US-UK tax treaty. This proposal could disproportionately affect American companies and may ultimately wind up interfering with the UK's trade commitments.

If enacted, this measure could also complicate the United Kingdom's push for deeper US-UK trade relations.

My take

I said earlier in the week that I thought this announcement by the UK Chancellor was political grandstanding. Let me amend that - based on the Digital Minister’s seeming ‘out-of-the-loop-on-this’ performance this morning, it’s badly thought-out political grandstanding that doesn’t suggest collective cross-government policy-making.

 

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