National governments are moving forward with their own digital services tax (DST) as patience wears thin on progress of rules at the OECD level.
“Every tax jurisdiction is going to be under pressure to collect more from all taxpayers, but probably foreign taxpayers are an easier target than local taxpayers,” says Laurence Field, partner at Crowe UK.
“What the current crisis will do is make some governments a little keener to go on a short term cash grab and then sort out the problems with the international tax system later rather than the traditional way of getting the system in place and then working out how best to implement it.”
In April, the UK implemented its own digital tax which requires a group’s business providing social media service, search engine or an online marketplace to pay two percent tax on its revenue.
The adoption of the new tax could well be beneficial for the UK government whose spending was estimated by the Office of Budget Responsibility (OBR) to be between £263.4bn and £391.2bn for the current financial year.
By response, tech giants are now passing the new costs onto their customers and advertisers.
Google said it will pass on the UK tax to advertisers from November in emails sent to advertisers and seen by CityAM. That followed a similar announcement by Amazon’s announcement last month.
Marcus Knight, co-founder of marketing agency Prospect Knight says the majority of the company’s clients are planning on reducing their spend by two percent as they cannot afford to pay the added tax.
Google said it will also pass on the DST charge to advertisers that run ads in Austria and Turkey, which accounts for five percent in those countries, according to CityAM.
“The interesting thing with Google advertising is that ads can appear in different countries if they are relevant to the user. People will need to be careful to exclude those countries if they don’t want to get taxed that higher amount,” says Knight.
Earlier this year, members of the OECD affirmed their commitment to tackling the tax challenges arising from the digitisation of the economy – but the US Trade Representative Robert Lighthizer said in June that the US was pulling out of negotiations as the tax mainly targeted American multinationals.
French finance minister Bruno Le Maire said it was the “last state blocking an agreement on digital taxation at the OECD” whilst speaking at the French Senate’s finance committee, reported Bloomberg.
Le Maire has since reiterated the urgency to implement a fair and efficient taxation system at an international level rather than local, during the Eurogroup meeting of eurozone finance ministers on Friday.
“You know how important it is for us to have a fair and efficient international taxation system as soon as possible. If you look at the consequences of the economic crisis, the only winners of the economic crisis are the digital giants. I think this is a new reason to accelerate the work we are doing within the OECD to have fair digital taxation and to also have the implementation of the minimum tax for the corporate tax,” he said.
However, Le Maire said during the meeting that the EU would need to prepare for a digital tax solution by the beginning of next year if the US decided to step out.
Failure to reach a global consensus could mean that jurisdictions adopt different digital tax rules – risking creating double taxation for those tech giants.
“The big problem is if countries do their own thing and that there is no coordination. Not only would it confuse the companies that are going to be affected by it, but it also throws up in the air how we’ve done cross-border trade and given relief for double tax for the last 50 years,” says Field.
“It doesn’t have to be an insurmountable problem, but it’s clearly one where the global economy has got a lot of challenges. They’re having more unknowns into the equation and now maybe isn’t the time for that to be the case.”
Field yet says the US election will bring further clarity on DST negotiations due next month.