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By Ben Stupples
The global debate around new taxes on the revenue of digital companies like Facebook Inc. centers on governments’ relations with U.S. President Donald Trump, according to a former senior U.K. official.
“There seems to be a world of saber-rattling at the moment,” Edward Troup, the U.K. tax authority’s former executive chair, said during a July 9 conference speech in London about governments’ stances on enforcing revenue taxes for businesses in the digtalized economy.
Whether the U.K. “should join the fun or try and be a bit more statesmanlike is an interesting gamesmanship question as to how you deal with the President of the United States.”
Internet-based companies’ lack of physical presence, together with the way they often derive huge profits from user-generated value, has created issues for tax authorities across the globe.
Troup’s comments at the conference, organized by the U.K.’s Institute for Fiscal Studies think-tank and the European Tax Policy Forum, mark his first in public on the ongoing debate around countries possibly imposing new taxes on the revenue of internet-based companies.
The Organization for Economic Cooperation and Development is aiming to find worldwide consensus on the issue in 2020. Ahead of that date, however, the EU’s executive arm in March proposed a 3 percent temporary tax on the revenue of social media and search engine companies, and online platforms like eBay Inc.
The same month the European Commission released its proposal, the U.K. Treasury said it was ready to introduce a revenue-based tax on these businesses in the absence of a global consensus. Other countries, including Italy and India, have already taken similar steps.
Policymakers have stressed they aren’t targeting U.S. businesses with their proposals. Nonetheless, the EU’s and U.K.’s interim measures would hit several American companies, like Alphabet Inc.’s Google, at a time when President Trump is threatening a global trade war.
Both the EU and the U.K. are opting for revenue-based levies on digital companies, as sales are easier for tax authorities to pinpoint as user-generated value in their jurisdiction in comparison to profits.
In a March 21 memo, the European Commission grouped companies built around “search engines,” alongside social media companies like Facebook Inc., as examples of user-generated value for businesses. The U.K. Treasury also indirectly cited Google in its own plans for a revenue tax on digital companies, arguing that grouped user data can boost a search engine’s efficiency.
In response to these proposals, Google warned at a University of Oxford business tax conference last week about incorrect assumptions on the role of user data in its search engine business.
A U.K. Treasury official said last month, meanwhile, his team is still “actively” working on policy for a revenue-based tax, despite recent claims that Britain had backtracked on its original plans.
If the U.K. introduces its own revenue-based tax on the likes of Facebook, the move wouldn’t mark the first time the British government has broken out from global policy efforts.
In April 2015, the U.K. introduced its diverted profits tax amid the OECD’s 15-action project to re-write corporate tax policy for multinational businesses. At the time, then-U.S. Treasury official Robert Stack said the U.K.’s move pushed the project in “a disturbing direction.”
At the July 9 conference, Troup acknowledged the negative effect of countries enforcing individual tax measures. He defended the decision to introduce the DPT, though, which penalizes multinational businesses improperly avoiding U.K. taxes through contrived structures.
“It had to be done in order to move the debate forward,” Troup said in a keynote speech at the conference. “It was the right thing to do at the time in order to improve things generally.”
Three years after the U.K. DPT’s introduction, European Commission officials are making similar comments to Troup about their reasoning for proposed interim taxes on digital companies.
At last week’s Oxford University Centre for Business Taxation summer tax conference, commission economic analyst Valeska Gronert said the EU wanted “to feed the discussion” around the taxation of the digitalized economy, “and maybe even push it a little bit.”
Tim Power, deputy director of the U.K. Treasury’s corporate tax team, acknowledged this attitude in the debate at a June 22 International Fiscal Association event in London.
Some countries “feel compelled to go down this route if their concerns aren’t addressed” through OECD-led tax policy reforms, Power said at IFA’s joint meeting with the Treasury and Her Majesty’s Revenue and Customs, the U.K. tax agency. For them, the interim measures are “a way of incentivizing other countries and businesses to come to the table.”
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