With current corporation tax laws taxing businesses on the basis of a physical rather than a digital presence, tech giants like Facebook, Amazon and Apple continue to generate enormous profits in Europe, while paying very low tax.
As an example, Facebook recently announced it was paying £15.8m tax in the UK, where its sales total £1.3bn. After tax credits, Facebook’s final bill will actually be £7.4m, which equates to less than 1% of their overall sales.
A Backlash against Big Tech
As more and more high street retailers collapse, controversy continues to rage over whether this is the fault of the US tech giants, or merely a symptom of changing shopping habits. Labour MP and former chairman of the public accounts committee, Margaret Hodge, was one of several prominent officials who vented their indignation at Facebook’s recent tax bill.
How Will the Proposed Tax Reforms Work?
Currently, there are several plans afoot to tax big tech. Austria, which holds the rotating six-month presidency of the EU, is spearheading a plan for an interim tax of three per cent on the revenues from digital activities of large companies which have a global annual turnover of 750 million euros and EU revenue of at least 50 million euros.
“Internet giants currently aren’t fairly taxed in Europe,” Austria’s Chancellor Sebastian Kurz told journalists in Brussels. “We support the commission’s proposal and demand the introduction of an EU digital tax for internet giants.”
Under the proposal, known as ‘Fair Taxation of the Digital Economy’, some 200 companies would fall within the scope, netting some 5 billion Euros of tax. The proposal suggests that by current standards digital companies face an average tax rate of around 9.5%, compared with a 23.2% for bricks and mortar businesses.
Autumn Budget Announces a UK Specific Digital Services Tax
Speaking at this week’s autumn budget, Chancellor of the Exchequer Philip Hammond announced plans for the UK to pursue its own digital sales tax, should there be failure to reach international agreement over a global tax. Hammond’s version would tax tech companies with a turnover of more than £500m a levvy of 2% from April 2020. Focussed on search engines, social media platforms, and online marketplaces, the tax differs from the EU model by not including businesses that sell data.
Labour’s Shadow Secretary of State for Digital, Culture, Media and Sport Tom Watson responded by saying: ‘The measure announced today is pittance for these massive international companies..The new tax isn’t even set to be implemented until 2020 at which time the tech giants will start to enjoy a 2% cut in their corporation tax rate. The lack of ambition in this announcement is derisory.”
How Much Would Big Tech Have to Pay in the UK?
We’ve looked over last years tax figures to calculate a rough estimate of what such a tax might raise for HM and Revenue. According to our figures, Google, Amazon, Facebook, Apple. Ebay and Twitter would have contributed just over 409 million in 2017 to the economy.
How Tech Giants Exploit the ‘Double Irish’ Tax Loophole
Under current tax laws, every subsidiary of a corporation settles its own tax bill separately and every subsidiary is entitled to buy and sell to each other. Facebook, as an example, bills UK advertising customers via Facebook Ireland Ltd which then makes payments to Facebook’s parent company in the US and royalty payments to Facebook Ireland Holding with the result that it declares little profit. While Facebook Ireland Holdings has a presence in Ireland, it’s actual tax domicile is in the Cayman Islands, which is tax-free. And since non Irish companies do not have to declare public accounts, the buck stops there. Tax Experts call this trick the ‘double Irish.’
Google used a similar trick moving some €15.9bn euros (£14.1bn) to a Bermuda shell company in 2016, thereby saving themselves £3bn in taxes. Their strategy, known as a ‘double Irish with a Dutch sandwich’ involves moving revenue from an Irish subsidiary to a Dutch company (with zero) employees, and subsequently on to a Bermuda mailbox owned by another Ireland-registered company.
From Double Dutch to Single Malt
While Ireland has now closed the tax loophole that allows the ‘double Irish’, companies already using the structure are allowed to continue employing it until the end of 2020. In the meantime, a new loophole known as the ‘single malt is gaining in popularity. This entails directing profits to countries with which Ireland has a double taxation agreement but which do not have any corporation tax such as Malta or UAE.
Are their downsides to a Potential Big Tech Tax?
By taxing companies on a percentage of revenue, there is always the possibility that a company with a high turnover, despite making no profit, might be taxed unfairly. “A digital services tax deviates from fundamental principles of income taxation by applying the tax on gross income, i.e. without regard to whether the taxpayer is making a profit or not’ commented Swedish Finance Minister Magdalena Andersson, and her counterparts from Denmark and Finland, Kristian Jensen and Petteri Orpo in a joint statement on EuObserver.
Will the GAFA Tax Further Strain Trans-Atlantic Tensions
For many, the greatest risk of an EU-wide tax is rather the risk of American backlash. Washington has already called the proposed tax an act of aggression against its tech industry and rolled out a 25 percent tariff on steel imports and a 10 percent tax on imports of aluminum, following it up with a tweet the next day which said ‘Trade wars are good, and easy to win.’
With France and Germany now offering their public support to back Austrian efforts to have all 28 EU member nations approve the tax, it seems increasingly likely the tax will pass.
In the meantime, US media responses to Philip Hammond’s UK based tax suggest the Americans are likely to react with hostility. “If the United Kingdom or other countries proceed, that will prompt a review of our US tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets,” said Kevin Brady, U.S. Representative for Texas’s 8th congressional district.3
Reviewed by: Mike Smith on 01 November 2018
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