Written by: Ollie Watts
In the array of economic measures announced in the recent Autumn Budget, one arose that has long been advocated, and much needed. Dubbed the ‘digital services tax’, Chancellor of the Exchequer Philip Hammond announced technology companies operating in the UK making the equivalent of over £500 million per annum globally will be subject to a higher tax. The Silicon Valley tech giants, namely Facebook, Amazon, Google, Apple and Netflix have all been heavily criticised in recent years for paying substantially lower levels of corporation tax than many other multi-national companies. Whilst free market economics provides healthy competition for business, sometimes it results in mass regulatory exploitation. This article will examine the tax background of the aforementioned tech giants, the key features of the digital services tax and, whether it will see the UK command more respect from these companies in the future.
How did we get here?
The UK corporation tax bills of the Silicon Valley tech giants in recent years, despite their global revenues are quite astonishing. It is useful to chart some of their financial history and the underlying reasons why it has remained so for many years.
Global revenue ($ billion) 2015: 107.01 2016: 135.99 2017: 177.87
Its UK corporate tax bill in 2016 was £7.4 million and £4.5 million in 2017
Global revenue ($ billion) 2015: 17.92 2016: 27.64 2017: 40.65
Its UK corporate tax bill in 2016 was £5.1 million and in 2017 was £15.8 million. The latter later reduced to £7 million due to ‘tax credits’
Global revenue ($ billion) 2015: 6.80 2016: 8.83 2017: 11.70
It paid NO UK corporation tax in 2017 and instead received a £174,000 tax rebate from the government
Global revenue ($ billion) 2015: 74.54 2016: 89.46 2017: 109.65
Its UK corporate tax bill in 2017 was £36.4 million and will rise to approximately £50 million in 2018
Global revenue ($ billion) 2015: 233.72 2016: 215.64 2017: 229.23
Its UK corporate tax bill in 2017 was £13 million
Certainly, as shown above, global figures for such companies will undoubtedly be high but what about UK figures? In 2016, Google had revenue of £1 billion. In 2017, Amazon had a pre-tax profit of £72 million, for example. Nevertheless their corporate tax bills are but a small fraction of their profits and revenues. It begs the question as to whether the government just turns a blind eye. The reality is quite different, it is the tax models that these companies deploy which appears to be the problem.
Big multinational companies use the ‘Double Irish’ and ‘Dutch Sandwich’ base erosion and profit shifting (BEPS) models which permits corporation tax avoidance on non-US profits. The former revolves around what you define as corporate residency, which for the US, given these companies are US founded, centres on where a corporation is based. Companies using the ‘Double Irish’ place intellectual property in an Irish registered company they have created, but this is actually controlled from tax havens such as Bermuda. Despite this, the US company using the method considers it to be tax-resident in Ireland when in fact it is going untaxed unless any payments are sent back to the US parent company. At that point they would then be subject to US taxation. So, on the face of it, the company appears to be subject to the Irish taxation system and compliant when in reality it is avoiding corporate tax at all costs. The ‘Dutch Sandwich’ builds on the ‘Double Irish: two Irish companies are set up, profits are sent through the first Irish company, paid to a Dutch company, then shifted to the second Irish company whose headquarters are in tax havens. The end result is virtually zero corporation tax is paid. It is reported the ‘Double Irish’ scheme is due to end in 2020 due to international pressures but Sinn Fein MEP Matt Carthy has said it will still be useable, and several tax experts have confirmed his claim.
The proposed digital services tax
It is worth noting this announced measure is not, if it goes ahead, scheduled to be in force until April 2020. Philip Hammond cited this was because the UK is ready to ‘go it alone’ against the tech giants, but is still waiting for the OECD (Organisation for Economic Co-Operation and Development) to put forward its proposal negotiated with the EU. Per the procedural infrastructure of the EU, all 28 member states would have to agree on this proposal but, Ireland, Sweden and Denmark have already voiced their criticisms. EU heavyweight Germany is also sceptical and wants a diluted version. Indeed, it seems at this rate the UK will be going it alone. The Chancellor claims the UK measure would raise £400 million a year, and because of the revenue threshold of £500 million a year, it only targets big companies, not smaller ones and emerging tech start-ups. We have very little other information at this point so we can only hypothesise and debate. Are there wider issues as to the UK enforcing such a measure? Given the current geo-political climate many countries are fearful of US President Donald Trump’s response; he has reacted harshly by way of counter measures to those which ‘attack’ US companies. He put a 25% import tariff on steel in pursuit of ‘America first’ trade which as a direct result of, the EU slammed counter tariffs on Levi’s jeans, bourbon whiskey and Harley-Davidson motorbikes. Clearly the UK should not engage in the US-EU trade war, particularly as it seeks to remain the ‘special relationship’ and pursue a free trade deal with the USA post-Brexit.
Will the tax gain respect?
This is a difficult one to predict. The UK is in quite a dilemma because in proposing this tax measure it is competing against the institution it is in the process of leaving, and risks the wrath of Donald Trump. On a national level there is far more consensus that large companies need to pay their fair share of tax. The OBR (Office for Budget Responsibility) seems to think it would only see the tech giants pay a mere £30 million more in corporate tax per year, but this is speculative. We can only judge this from data history if and when it is enforced. Regardless, there is some opposition from the tech community;
Russ Shaw, founder of Tech London Advocates – ”Brexit, with all its uncertainties, is bringing enough economic disruption as it is. Tackling the digital tax question without coordinating efforts with the US and EU as key global partners, will only further entrench Britain in an isolationist position we cannot afford.” (City A.M)
It could be suggested there may need to be negotiation with the Republic of Ireland despite the fact UK legislation is clearly not applicable to it. In theory if the tax is introduced, the tech giants could move out of the UK and focus on Irish operations to ensure continuing use of the Double Irish and Dutch Sandwich arrangements. Henceforth, the tax would become redundant. Given the revenues it makes in the UK and the UK demand for their services, from a commercial perspective this is unlikely. We can continue to hypothesize and debate, but the overarching message to the tech giants from the UK proposal is that we are no longer willing to be financially exploited, and if you want use of our market, you must pay your fair share.
In conclusion, this proposed taxation is welcomed in the UK, particularly by both sides in the House of Commons but is subject to mixed reaction in the world of business. Its intricacies need to be developed and publicised, and only then will we have a better idea of the scale of its potential impact. The world of business and taxation is always adapting so the UK proposal needs to be stringent and minimise as much exploitation as possible. During the Brexit negotiations the UK has been subject to criticism and some have viewed it as a weak, diminishing nation. Perhaps with this tax it could take steps to restoring respect by countering a problem there is a general reluctance to follow through on.