U.K. Proposes More Taxes on Tech – Will the World Follow?

Few could imagine a functional life without Google, Amazon, or Facebook. But the overwhelming surge of influence and clout has brought with it a series of complicated questions. Key among them is an issue governments worldwide continue to grapple with: how do you properly tax companies whose economic activity is primarily generated online?

Taxing Tech

Traditionally, “income is taxed where value is created.” But tech’s biggest companies are true global businesses, making that ‘where’ unclear. Many are headquartered in the United States, with satellite offices around the world. The internet and rise of digital services mean customers can be anywhere – a true boon economically. But the most visible companies have recently come under fire, scrutinized in a way previously unimaginable relative to the goodwill they had engendered. Privacy and security concerns have garnered recent headlines, but issues of revenue reporting are joining them front and center.

Critics say that large tech companies “[report] relatively little of their profit in local jurisdictions” where they sell services and products. The reason is that “customers in those countries are actually buying from a unit based elsewhere, often a low-tax country” – the company office in operating country functions more as a “marketing and support” entity that the “overseas unit that actually makes sales reimburses…for expenses, leaving little taxable profit.”

Governments in wealthy nations acknowledge there is a problem and agree that something needs to be done – the Organization for Economic Cooperation and Development (OECD) “has been leading the international digital-tax talks” to develop a solution.

But conversations have not yielded a unified plan, and the clock is ticking. That delay became untenable for the UK, who decided to move forward with their own tax beginning in 2020.

The UK leads the way

The UK “first-of-its-kind” tax is designed to capture some of that locally generated revenue – the Wall Street Journal calls it “the most concrete attempt yet by an industrialized nation to rewrite the world’s tax code for the digital era.” According to UK Treasury head Philip Hammond, the tax would focus on profitable companies “generating UK revenue from services including search engines, social-media platforms and online marketplaces…with global revenue of at least £500 million ($641 million)…[constituting] 2 percent of such a company’s revenue in the UK.”

Hammond called the existing climate “clearly not sustainable, or fair,” declaring that “we cannot simply talk forever.” Data does show a discrepancy – the Wall Street Journal reports that Companies House, the UK executive agency in charge of registering companies, cited Amazon U.K. Services Ltd as paying £1.7 million (roughly $2.1 million) in UK taxes on £1.98 billion ($2.5 billion) in reported revenue and £72.37 million (almost $99 million) in pretax profit. Facebook and Google had similar incongruities, with Facebook paying £17.19 million (around $22 million) in taxes on £1.26 billion ($1.6 billion) in revenue and £62.76 million ($80 million) in profit and Google UK responsible for £47.36 million (close to $60.5 million) in tax payments on £1.26 billion ($1.6 billion) in revenue and profits of £200.55 million ($256 million).

Opposition

Though the tax would be a relatively small addition to the tax bill of tech power players, there is a significant amount of pushback from companies, lobbyists, and more. Some are concerned that a country-by-country approach will adversely affect smaller tech businesses; others believe the measures amount to double taxes that will hinder job growth, investment, and trade. Rufus Yerxa, president of the US National Foreign Trade council, told the Wall Street Journal that the UK tax “could disproportionately affect American companies and may ultimately wind up interfering with the UK’s trade commitments…[complicating] the United Kingdom’s push for deeper US-UK trade relations.” The companies themselves, however, remained quiet, offering no public comments.

The Pressure Grows

Potential revenue gains seem to outweigh the myriad difficulties associated with creating and implementing digital taxes. The European Union continues to develop a three percent revenue tax for tech companies in member nations; South Korea, India and at least seven other Asian-Pacific countries are looking at their own version of a tax, including Malaysia, whose deputy finance minister, Datuk Amiruddin Hamzah, stated he “[thinks Malaysia] will be losing revenue” if they ignore digital taxes. Mexico, Chile and other Latin American nations are poised to follow suit.

The most immediate effect of the UK tax may be the pressure it puts on countries to finalize a truly unified global agreement. This includes the United States, where Treasury Secretary Steven Mnuchin called the tax proposals “unilateral and unfair” as he appealed for renewed focus on finalizing the OECD agreement by the stated goal of 2020. Pascal Saint-Amans, who heads OECD’s tax-policy center, said they recognized the “political urgency” of reaching a consensus, admitting that “[The OECD] cannot ignore it.” A new dawn for digital taxes appears imminent, even if it could take years to iron out the details.

Quandary Peak Research

Based in Los Angeles, Quandary Peak Research provides software litigation consulting and expert witness services. We rapidly analyze large code bases, design documents, performance and usage statistics, and other data to answer technical questions about the structure and behavior of software systems.

Leave a Reply