Legal tax avoidance by multinational corporations is estimated to cost national governments around $650bn per year. While most of this loss is suffered by the developed nations, it is reckoned that developing countries lose around $200bn.
In 2013, the G20 and the OECD began global efforts to tackle this. The task is a monumental one so it’s hardly surprising that progress has been slow. Nevertheless, the OECD is well on the way to securing agreement for proposals which would subject multinational corporations to a minimum rate of tax.
While all this has been going on, countries such as Australia, Austria, Canada, France, Germany, Italy, Mexico, Spain and the UK have all begun to plan or impose new taxes aimed at big tech companies. There are three drivers for this. First, to boost the tax receipts of these countries. Second, to respond to public concerns that multinational tax avoidance offends social justice and damages national firms. Third, as part of this, to stave off the decline of high streets in an era of e-commerce.
This brings us to the UK’s digital services tax (DST). If implemented as expected, from April 2020 the UK will levy a new 2 per cent tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users.
First proposed in 2018, and subject to a consultation which ended in 2019, the DST will apply when the group’s worldwide revenues exceed £500m and when more than £25m of these revenues are from UK users. Affected businesses and their advisers fear that compliance with the DST rules will be complex and time-consuming. For its part, HMRC estimates that, once the tax is up and running, it will generate revenues of around £400m per year.
Most of the multinational corporations affected by the new digital taxes – whether as a result of the OECD initiative or local measures – are headquartered in the USA. It’s too early to say yet, but while the OECD measures are unlikely to greatly increase the global tax bills of affected corporations, they will significantly change the places in which the tax is payable. The tax regime for these corporations will therefore look different but seems unlikely to significantly increase their liabilities when measured as a proportion of global revenues.
The UK government, like France and many others which are currently implementing their own solutions, has committed to repealing DST once the OECD’s international solution is operating. Double taxation of corporate profits is therefore unlikely to be a problem.
Nevertheless, corporate worries about the changing patterns in the global taxation of multinationals have ascended from US boardrooms to the White House. President Trump has responded with a threat to impose 100 per cent tariffs totalling $2.4bn on targeted luxury goods imported from France, with similar threats against other countries which are imposing their own taxes on tech companies headquartered in the USA.
Three possibilities flow from this.
First, one way or the other, these national disputes between the USA and countries such as the UK and France will be resolved.
Second, if the disputes This are not resolved, then current US policy raises the spectre that it will seek to disapply whatever new tax measures come out of the OECD initiative, with the implication that the USA could then no longer be a member of the OECD and potentially the G7 and the G20.
Third, the UK’s position in forthcoming trade negotiations with the USA and the EU is significantly weakened. The importance of this should not be underestimated. If two trade agreements are to be successfully concluded, the UK negotiating team will have to strike a delicate balance between the requirements of the USA (agricultural products and pharmaceuticals to name but two hot topics) and the EU (goods and services regulatory alignment, for example). The incompatibilities are obvious, the economic implications huge. Whether it’s worth pressing ahead with the DST, which puts the UK at a significant disadvantage with the USA for the relatively modest annual tax yield of around £400m, is a judgement call for Prime Minister Boris Johnson and Chancellor of the Exchequer Sajid Javid.