A digital services tax (DST) is essentially a sales tax on large online companies, allowing tax authorities to derive an income stream from the tech giants’ advertising and sales platforms based on usage in a particular jurisdiction rather than where their profits end up.
While it is only ever likely to impact a small amount of highly resourced multinational companies, and its yield will be relatively minor, DST has proved a major bone of contention between those who believe the digital economy should continue to grow largely as it has done and those who believe its profits must be subjected to more stringent national tax treatments.
In this regard, 2020 has been no different. While some decisive steps forward were made earlier in the year, and Covid-19 has created a stark new backdrop for taxation policy, the arguments around DST have only grown more fractious.
Divided Europe
Ireland, as the European HQ of many US online and social media companies, has opposed plans for an EU-wide DST over the years. It argues that the OECD is the right forum for what should be a global approach to reform and that any EU-imposed DST would lead to certain retaliation by the US, which is home to the majority of impacted companies.
Last year, a proposal by France for a 3% EU-wide levy on the digital advertising revenues of the internet giants hit the rocks when Sweden and Denmark joined Ireland in opposing it. At the time, Ireland’s tax authority estimated that it was likely to impact a small amount of highly resourced multinational companies, and its yield will be relatively minor, putting the cost to the exchequer of an EU-wide introduction of the tax at €160m annually.
Growing frustration at progress has seen countries act unilaterally, with Austria, France, Hungary, Italy, Poland, Turkey and the UK deciding to implement a DST. Belgium, the Czech Republic, Slovakia and Spain have published proposals to enact a DST, and Latvia, Norway and Slovenia have either officially announced or shown intentions to implement such a tax.
Introducing a digital services tax has proved a major bone of contention
Fighting back
The UK government has estimated that its digital services tax (DST) will produce £500m a year for the Treasury. However, since its introduction in April, Amazon, Google and Apple have all indicated that they intend to pass on the 2% charge to the individuals and companies using their sites to sell goods or run adverts.
In a statement, Google said: ‘Digital service taxes increase the cost of digital advertising. Typically, these kinds of cost increases are borne by customers and, like other companies affected by this tax, we will be adding a fee to our invoices, from November.’
Since April 2020, the UK revenues of online companies meeting a certain threshold have been subject to a 2% tax. However, this has been described as an interim measure by the British government, and, in late August, media reports suggested that UK Chancellor of the Exchequer Rishi Sunak had gone cold on the tax, believing the money raised would be no compensation for the risk of jeopardising trade relations with the US.
It is concern built on solid ground, given the scale of the Trump administration’s opposition to DST. In June, US Treasury Secretary Steven Mnuchin abruptly withdrew the US from negotiations with European countries on proposed solutions around DST.
Mnuchin said that these talks had made no progress, and warned uncompromisingly of a significant US response if European countries, individually or collectively, forged ahead with the tax, including the imposition of trade tariffs.
Two pillars
The OECD’s working position on DST has been that it forms part of a ‘two-pillar’ solution. The first of these pillars supports the right of countries to tax profits in the way DST does (but encompasses a broader range of goods and services), while the second provides for a global minimum corporate tax rate to halt a race to the bottom in corporate tax rates.
As he withdrew the US from discussions on DST, Mnuchin insisted that talks on the latter could proceed. However, it was not a view shared in Europe, with French finance minister Bruno Le Maire describing the US position a ‘provocation’.
The Financial Times assessed the emerging situation as bleak, saying it ‘dashes international discussions under the auspices of the Paris-based OECD for a more equitable approach to taxing multinational companies’.
Next steps
Many will argue that the results of the US presidential election next month will determine the next chapter of this increasingly tortuous story. Meanwhile, while the Covid-19 pandemic has decimated national economies, the global imprimatur for the public to stay at home has proved a boon to the internet giants, making their relatively low tax contribution to national economies even more problematic.
OECD secretary-general Angel Gurría has argued that if the path to a global solution is not in place by the end of the year, ‘more countries will take unilateral measures and those that have them already may no longer continue to hold them back’.
While Gurría argues that trade tensions and retaliation ‘would hurt the economy, jobs and confidence even further’, governments may conclude that these outcomes are acceptable as collateral damage if they finally bring the online giants into their taxation sphere.
