Taxing tech giants: the challenges accountants should know
As the OECD delivered its global approach to taxing digital services, tax experts warn current accounting norms are due to be axed, with challenges and changes in the months ahead.
“The arm’s length principle which is what we’ve had for a long time – that all the profit should go to me regardless of me being in a tax haven – is no longer acceptable,” says Wendy Nicholls, partner and head of transfer pricing at Grant Thornton.
The proposal from the Organisation for Economic Co-operation and Development (OECD) and G20, comes at a time of increased scrutiny on lucrative digital services peddled by Google, Amazon, Facebook and Apple (GAFA).
Alphabet, the parent group of Google, generated revenue of $31.84 billion in the last quarter of 2018, and most recently came under fire for shifting $23bn to its Bermuda tax haven.
“It’s sometimes presented as public opinion on the one hand and rapacious business on the other, and they’re looking in completely different directions – I don’t see that,” says Nicholls. “I see businesses trying to do their best and accepting there will be some changes in the tax landscape.”
The OECD’s proposal is laid out in two pillars. The first pillar (Chap.2) aims to develop a consensus-based solution on how cross-border digital tax should be allocated among countries.
The second pillar (Chap 3) relates to a minimum rate which each jurisdiction would set for the tax.
“As tax professionals, our job is to help our clients pay the right amount of tax and not get hammered with double tax. Our clients don’t spend their time thinking, ‘how can I spend no tax whatsoever,” says Nicholls. She said that Grant Thornton wants to make sure there aren’t “too many brakes” on their clients’ growth.
And it is on the double tax front that a globalised approach to digital service taxation could have real effect, believes Nicholls, who works with the business and industry advisory committee to the OECD.
“The international tax framework, although not perfect, [has] been usable for quite a long time, and has helped businesses not suffer double tax,” she says, “but it was all about bricks and mortar which doesn’t work in a global economy of intangible assets and services.”
And consensus is needed on a global level for digital services taxation, said director of international policy at PwC, David Murray, especially given historic levels of international disagreement.
“There’s nothing that would stop countries bringing that part in on their own but it wouldn’t be wholly effective without everybody else agreeing to do something similar,” says Murray. “Realistically lots of countries could act together, like at the EU level, and introduce something if they all agreed, but again, we haven’t seen sufficient consensus – the global agreement is quite difficult.”
The OECD makes it clear that “a consensus-based solution” is something all 129 countries would need to agree to and “require political engagement and endorsement”.
If international consensus is difficult, Murray does point to the US as an example of attempting to implement minimum tax rules, or pillar two under OECD’s proposal, under GILTI.
“The challenge for the UK and others, is that they can only tax the profits of business where that company has some sort of physical presence in the UK,” says Murray. “The UK believes that many technology companies create value through interaction with users of a platform, and that value is being created in the UK. The UK would like to change the tax rules to attribute some profit to the interactions between the users and the company,” he says.
Besides the difficulty and disparity of international consensus, the UK must also firm up on how it defines intangible digital services and assets, believes Murray.
“The UK has taken the approach of looking at particular business models – search engines, online marketplaces and social media platforms – and suggest companies ringfence those businesses.
“Take ‘search engine’ for example, their definition is where you have the ability to search on a website where the results take you to other websites. There’s clearly a challenge around defining those models without dragging some other businesses into scope,” says Murray.
Looking ahead, Grant Thornton’s Nicholls outlined what she advised clients was likely to come out of the proposal.
“We will get something on allocating profit to market jurisdictions,” says Nicholls. “There will be some sort of consensus involving an element of giving the non-routine profits to market jurisdictions. If we have a client who is expanding into many countries, they’re going to have to think about how much tax they’ll pay, far earlier than they otherwise would.
“The second element is that if you’re not paying enough tax globally, we’ll have an income inclusion rule or some denial of a deduction rule, which will pull up your effective tax rate,” she says.