Is a digital tax war coming?
A tax storm is brewing! Recent reports suggest the US is considering slapping 25% tariffs on British exports in retaliation for the UK’s digital services tax, which has had a significant impact on American tech giants including Google, Amazon, Facebook and eBay.
The UK imposed a 2% digital services tax in 2020 – and is far from the only country to have taken steps to capitalise on taxing companies generating huge sums from online sales and activities.
If the Biden administration confirms the tariffs on British exports to the US – of which the most popular include clothing, footwear, ceramics and furniture – it is expected to raise about $325 million; approximately the amount the UK’s digital services tax is likely to generate from the largest US digital organisations.
Why are digital services taxes being introduced?
More countries around the world are implementing digital services taxes, while many others are currently planning to do so.
According to the Organisation for Economic Cooperation and Development’s (OECD’s) Consumption Tax Trends 2020 report, VAT is now the largest source of consumption tax in OECD countries; it should therefore be no surprise that governments are starting to show their willingness to apply tax to some of the enormous revenues generated online, both to increase their own incomes and to level up the way online merchants and physical stores are taxed.
Some point to an ‘unfair’ advantage enjoyed by many online marketplaces for so long. In the UK, for example, Amazon paid just £14.4 million of corporation tax in 2019 despite generating revenue of £13.7 billion in the country.
In addition, the Covid-19 pandemic and subsequent decline in spending in physical stores has further accelerated the rise of e-commerce and social media marketplaces – and countries can no longer to overlook these revenues in tax terms.
Where is digital tax being introduced?
Among the world’s largest economies, many have already introduced digital services taxes or are in the process of doing so, including:
Introduced in April 2020, the UK’s digital services tax imposes a 2% charge on the revenues of social media giants, search engines and online marketplaces.
France resumed collections of its digital services tax in December 2020, having initially implemented it in 2019. The 3% tax applies to all revenues generated in France by online companies.
Canada’s first Budget in two years is due to be presented to parliament today and includes a proposed sales tax for e-commerce warehouses and online platforms, as well as a digital services tax for online giants.
Italy’s digital services tax was introduced on 1st January 2020 and applies a 3% charge on businesses that earn digital revenues above certain thresholds in the country.
The EU is still prepared to wait for an agreement to be reached at an international level, but if one is not forthcoming it will push ahead with its own model for taxing the digital economy. That’s the view of Joao Leao, the Portuguese Minister of State for Finance and current EU Council president, who recently said the EU is contributing to OECD negotiations but, in the absence of progress, there is “willingness to find a European solution”.
Five separate bills that include the introduction of a digital services tax are currently pending consideration in Brazil’s Chamber of Deputies and Senate.
What could US action against digital services taxes look like?
It goes without saying US firms will be hit harder than most by the global introduction of digital services taxes. According to Visual Capitalist, 15 of the world’s 20 most valuable tech brands in 2020 were from the US, including most leading online retailers.
Digital services taxes will change the business model for many tech giants; forcing them to recoup additional monies from third-party sellers or increase the prices consumers are asked to pay.
With the US reportedly considering introducing tariffs on British and French imports in response to the countries introducing a levy on online firms before a wider international agreement was reached, it remains to be seen whether it will respond in similar fashion to other countries that have turned to digital taxes.
If it does, tax teams around the world will face an unprecedented challenge to ensure compliance with not only the raft of new digital taxes, but also the tariffs slapped on a multitude of goods in response.