Philip Hammond, a man so detail-focused as to have earned the nickname “spreadsheet Phil”, looks an unlikely warrior in the latest “tech-lash”.
But this week the UK’s chancellor of the exchequer joined the vanguard of finance ministers fighting back against tax arbitrage by the world’s largest technology companies. In his annual Budget, he proposed to make “global giants with profitable businesses in the UK pay their fair share” through a “digital services tax” on revenues, which could come into force in 2020.
The measure, which would apply only to profitable companies with annual global revenue from certain services of more than £500m, is aimed squarely at the big US companies, such as Amazon, eBay, Facebook and Google.
It aims to protect smaller, locally-rooted businesses which are unable to shift revenues to friendlier tax regimes, and to satisfy a growing public perception that big technology companies pay less tax in the UK than they should.
Boil away the populist rhetoric, though, and Mr Hammond’s idea looks likely to become mired in what one lawyer describes as “the digital version of the Jaffa Cake conundrum” — a notorious 1991 definitional dispute over whether the popular British chocolate-and-orange snack should be taxed as a biscuit or a cake.
The dispute over a tech tax could become a defining clash for modern capitalism, pitting the forces of globalisation and the huge tech companies they have produced against the growing popular discontent about shape-shifting big business.
While the issue cries out for a multilateral approach, such global solutions are out of favour with many, including the president of the US, which is home to many of the biggest tech companies.
The tax tech-lash is anything but a UK phenomenon. Emmanuel Macron, the French president, has made fairer taxation rules for digital companies one of his biggest political priorities and is pressing for an EU-wide agreement before elections to the European Parliament next May.
In a letter sent last week to a number of non-governmental organisations and federations across Europe, Bruno Le Maire, French finance minister, wrote: “When the largest digital multinationals don’t pay their fair share of tax, the rest of us end up paying more.”
Spain’s Socialist government has proposed a 3 per cent tax on online advertising, sales of user data and online platforms, inevitably dubbed the “Google tax”. “New business areas are not well reflected in the current tax system,” María Jesús Montero, Spain’s finance minister, said recently. And on Tuesday, EU finance ministers will gather in Brussels over plans for an EU-wide digital services tax of 3 per cent of revenues.
As in all matters fiscal, though, it is more complicated than that. Much more complicated.
Mihir Desai, a professor of finance at Harvard Business School, says countries are “asking more and more of corporate tax at a time when it can do less and less”. They are using taxes on companies as a way of raising money, a vehicle for populist sentiment, and a part of national industrial strategy. “We appear to be quite anxious to use tax against larger institutions in aggressive ways,” he says.
Technology companies are not fiscal innocents. They have in the past exploited loopholes in the international system, such as the “Double Irish” arrangement which allowed Google and Facebook to route royalties through Irish subsidiaries to reduce tax bills. Other multinationals, including pharmaceutical companies such as Pfizer, also exploited the loophole.
But the technology business poses unprecedented problems for tax authorities. Digitalisation makes it hard to determine the location of the companies’ activity, while globalisation has made it easy for them to establish operations in jurisdictions with low tax rates. “Companies do follow the incentives countries give them,” says one US tech executive.
Pressure from governments and international organisations — and an awareness among technology companies that tax avoidance is not a good look — have started to plug some of the most egregious loopholes. Ireland took the “double Irish” off the menu in 2015, and companies will have to phase out their use of it by 2020. Facebook, for instance, announced last December it would move to a “local selling model” in many countries, paying tax locally rather than through its international headquarters in Ireland.
But an intergovernmental approach to taxing technology companies is hard to agree, or even frame in a way that matches the rhetoric about “fairness”.
The UK’s decision to go it alone with its 2 per cent levy on revenues raises the prospect of EU talks breaking down and governments forging ahead with their own levies — the very situation the European solution was designed to avoid. France has told its allies it is willing to follow the UK “if necessary”, according to two senior officials.
The EU plan, which requires the unanimous support of all 28 member states, already faces opposition from within the bloc. Germany is concerned that any interim EU tax will provoke retaliatory measures from the US. Smaller member states such as Ireland and Luxembourg fear it will harm their economic competitiveness and ability to attract tech groups.
Some European companies are lobbying against the measure, too. This week, European tech groups — led by Spotify, the music streaming service — publicly voiced their opposition to the tech tax for the first time. Chief executives of Spotify, Booking.com, the travel site, and Rovio, creator of the Angry Birds game, among others, said European tech companies whose revenues are generated in the EU would be hit harder than large US companies that are better resourced to cope with any new levies.
“The proposed DST has been designed with large and highly profitable companies in mind, but will have a disproportionate impact on European companies, resulting in unfair treatment,” they wrote.
Businesses in other sectors, such as Germany’s carmakers, are also against any EU tax that targets revenues from companies who engage in the sale of data. The automotive companies fear such taxes could penalise them for “smart car” technology, which collects personal information from drivers.
Similar definitional concerns have been expressed about the tax proposed this week by the UK, where it once took months to resolve that the Jaffa Cake was indeed a cake and should escape value added tax. Analysts say it is unclear, for instance, whether app stores such as those operated by Apple or Microsoft would be covered by the measure. It is “crazy” to try to define digital companies, says Michael Devereux of Oxford university’s Centre for Business Taxation. “Is Tesco [the retailer] a digital company, because of its internet sales? Are banks? A lot of banking takes place online.”
European countries might be betting that Donald Trump will not retaliate against the new tax given that he is no friend of Big Tech— he regularly tweets against Jeff Bezos, Amazon’s founder, for instance. However, the US president will face some pressure to respond.
On Wednesday, Kevin Brady, Republican chairman of the US House of Representatives’ ways and means committee, described the UK and EU initiatives as “troubling”. “Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab,” he said.
According to Colm Kelly, who leads PwC’s global tax and legal services practice, the risk of corporate tax reform being led by individual countries is “we end up with an enormously complex mishmash of different approaches around the world”.
The US reinforced its claim to US companies’ global revenues in the tax reforms it passed last December. They included a provision on “global intangible low-taxed income”, or “Gilti”, which taxes “excess” profits earned from a company’s intangible assets such as patents and other intellectual property held abroad.
The US technology companies have mostly preferred to stay quiet on the latest episode of the tech-lash, though they question the overall premise that they are not paying their fair share in the EU, pointing to research that shows digital companies pay between 26.8 and 29.4 per cent in effective corporate tax, not 9 per cent, as the European Commission has claimed.
“This is a persistent problem,” says the same US technology executive. “It’s a reputational problem. How do we get to a point where we pay the kind of numbers the press wants?”
Most back the continuing, slow-moving negotiations towards an international agreement to update digital taxation rules, under the auspices of the OECD and G20.
Luca Maestri, Apple’s chief financial officer, says the company needs to study the UK proposal, which was “probably directed more to other tech companies than us”. He adds that Apple’s “preferred direction” is to “harmonise tax systems and make sure businesses have a clear and transparent understanding of the tax landscape” under the OECD process.
Many of the unilateral measures pre-empt or anticipate that global approach. Mr Hammond’s UK proposal will only come into force if an alternative international solution cannot be reached by 2020.
According to Harvard’s Prof Desai, the most likely outcome is that individual states will muddle through with a piecemeal approach to corporate tax. But he warns that “in this populist urge to make sure we . . . nail the people we want to nail, we should be careful about some of the collateral consequences”.
Additional reporting by Michael Stothard, Madison Marriage, Harriet Agnew, Hannah Kuchler and Tim Bradshaw
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