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By Ben Stupples
The world’s four largest accounting firms have warned the U.K. Treasury against imposing a levy on the revenue of digital companies like Facebook Inc. and Google Inc. to make them pay “fair” taxes.
U.K. Treasury Financial Secretary Mel Stride said that taxing technology companies’ sales was the “potentially preferred route” for the government in a Feb. 22 interview with the BBC. Increasing tax on digital giants is a major priority for countries across the European Union.
Deloitte, EY, KPMG, and PwC told Bloomberg Tax the proposed measure would be a complicated challenge that may cut sales, hurt loss-making start-ups, and undermine global policy efforts.
“Is a revenue-based tax a good idea? Our general view is that, no, it’s not,” Bill Dodwell, head of tax policy at Deloitte U.K., said Feb. 27. “Start-ups will struggle to pay a tax on their sales when they have a big loss and they’re trying to grow their business.”
Taxing digital companies’ revenue in a way the public would consider fair is “not at all straight-forward,” Melissa Geiger, head of international tax at KPMG, said Feb. 26 by email.
“I appreciate that the U.K. and other governments are trying to figure out an appropriate way to tax what is essentially a new sector of the economy,” she added, but that “is going to be challenging.”
The comments come as governments worldwide try to modernize their tax laws to adapt to how internet-based companies make huge profits by creating value from customers in their jurisdiction. Countries including India and Italy have imposed revenue-based taxes on digital companies in the past two years. The European Commission and the OECD, meanwhile, will both publish reports on how to reform the taxation of the digital economy by the end of April.
“We recognize that there are businesses, generating substantial value in the U.K., who we don’t believe are currently paying a fair rate of tax,” Stride told the BBC. “But is quite different from saying they are not paying the tax they should be paying under the current regime.”
The U.K. is an important market for some of the world’s largest internet-based businesses.
Facebook had sales of $6.5 billion across Europe in 2016, according to Bloomberg data. In the same year, the Menlo Park, Calif.-based company’s U.K. subsidiary recorded sales of 842 million pounds ($1.2 billion), according to latest full-year accounts. Similarly, Google U.K. reported more than 1 billion pounds in revenue during the same period, according to its latest annual results.
While a sales tax won’t significantly hurt these businesses, EY’s Global Head of Tax Policy Chris Sanger warned against imposing a single-rate levy on all internet-based businesses.
Profit margin variations “may mean that a tax at one rate that might be deemed fair to some could penalise others,” Sanger, the U.K. Treasury’s former head of business tax policy, said Feb. 27 by email. In addition, “the fact that turnover taxes can be penal in nature could undermine the potential to invest, or even halt sales in particular markets.” Like Sanger, PwC U.K.'s Head of Tax Policy Stella Amiss cited the scope of any sales tax as a key issue.
Any measure should be “appropriately targeted and subject to the proper level of consultation to avoid the risk of double-taxation,” she said by email Feb. 26. The U.K. must also ensure it doesn’t undermine the ongoing global policy efforts on the taxation of the digital economy, she added.
In a November 2017 policy paper, the U.K. Treasury said it was ready to take more individual action on internet-based companies in a warning shot for countries to reach a common solution.
Any action would accompany the U.K.’s diverted profits tax, introduced in 2015 amid concern that Google parent Alphabet Inc. and other tech companies were avoiding taxes by moving their profits offshore. At the time of its introduction, the measure sparked controversy as the U.K. took individual action amid the first international efforts to find a common policy on taxing the digital economy.
In its policy paper, published alongside the U.K. Autumn Budget, the Treasury said it would try to minimize the negative side-effects a revenue-based tax may have for internet-based businesses.
The government’s options include double tax relief, a threshold for when the revenue levy would apply, and mitigating provisions for loss-making and early-stage businesses, the Treasury said.
As many digital-based start-ups make losses, Amiss welcomed the option of a starting threshold. Dodwell, though, said none of the mitigating options substitute levying taxes on profits.
“I don’t expect agreement between governments at an international level this year—I really don’t,” he said on the upcoming reports from the EU and the Organization for Economic Cooperation and Development. “It’s just such a complex issue that needs a lot more work.”
“In my view, the first question for policymakers to explore is how these businesses capture and monetise value from users and the data those users generate,” Geiger said. “Understanding this should allow clearer international rules to be developed to ensure that this value is fairly taxed.”
Echoing the big four accounting firms, the U.K. technology sector’s main lobbying group responded to Stride’s BBC interview by warning about measures that could hurt smaller digital businesses.
In comments sent Feb. 28 to Bloomberg Tax, techUK’s Head of Policy Giles Derrington said the technology sector recognized the need for the tax system to evolve, but any changes should be resolved at an international level. A revenue-based tax is a “short-sighted proposal,” he added.
Highlighting the Italian government’s December 2017 move to impose a 3 percent sales levy on large internet-based companies, Sanger said the debate taxing the digital economy is gaining momentum.
“Digital taxation has been floating in the background since 2015 but the debate around this has now moved up a notch and is moving at a disruptive pace,” he said. “While change is inevitable, let’s hope that the disruption doesn’t result as a barrier to technological progress we have already seen.”
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