Internet companies targeted by new tax plans

More than 130 countries around the world are exploring new plans to tax internet companies such as Facebook and Alphabet (Google), which make the majority of their sales online and often shift their profits to low tax jurisdictions to pay lower rates.

France was the first country to enact such legislation in July, when it introduced a 3% digital services tax on the gross revenues derived from digital activities where French “users” are considered to play a major role in value creation. The new tax is imposed on companies that have revenues surpassing €750 million from taxable digital services supplied worldwide and €25 million for taxable digital services supplied in France, in effect taking aim at the 30 largest internet service companies, almost all of which are US-based.

Other EU nations are watching the fallout from the French legislation carefully, with the UK also believed to be considering such legislation, and the EU also exploring such measures on a continental scale, with a number of government keen to recoup some of the value created within their borders by these companies, but currently shifted to low tax locations such as Ireland or Bermuda for tax savings. And the countries are right to be concerned as according to 2018 figures from the European Commission, the multi-billion dollar global technology firms targeted by such legislation currently pay an average tax rate of 9.5 percent, compared to an average of 23.2 percent for traditional firms.

An EU-wide digital tax was scrapped after it was vetoed by Sweden, Finland, Denmark and Ireland, but on a member state level such taxes are likely to be widely introduced across Europe in the coming years. The UK is expected to introduce a 2% digital tax in 2020 if it ever finds a way out of its current Brexit-related morass, and Austria, Italy, Spain and Belgium are similarly exploring the idea.

Importantly, these measures to tax huge faceless corporations are also popular with the electorate, who have become increasingly hostile to the idea of companies such as Amazon and Facebook not paying what they consider to be their “fair share”, even if what they are doing is legal under the current framework.

What about the US?

These new digital taxes target mostly US companies, and it is therefore little surprise that France’s decision to enact such legislation was met with accusations of discrimination from Washington, which is considering the introduction of retaliatory tariffs. However, the US is facing similar issues about internet companies shifting profits on an interstate level within its own borders. Only last year, the US Supreme Court created the idea of a so-called “Wayfair nexus“, which allows for states to charge tax on purchases made from out-of-state sellers even if that company has no physical presence, such as a shop or a warehouse, in the state.

A global response

Earlier this year, 134 countries agreed the global tax landscape that was developed in the 1920s was no longer fit for purpose and tasked the OECD to come up with proposals.

Now published, the OECD plans set out clear definitions of how much businesses must do within a country to be deemed taxable there and how to determine what percentage of the profits should be taxed. The general rule is that governments of a country where a company’s product is located of customer is based should have a larger share of the tax on that transaction than the country, often a low tax jurisdiction, where the company has based its headquarters.

These proposals are planned to work alongside a second track of tax reforms guided by the OECD that aims to create international agreement for a minimum global corporation tax rate to avoid a race to the bottom with countries attempting to convince multinationals to base their headquarters within their borders purely for lower tax rates.

Photograph by Rawpixel

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