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By Ben Stupples
The U.K. government is still reviewing policy issues for imposing a new tax on the revenue of digital companies like Facebook Inc. and Google Inc., despite claims it had backtracked on original plans.
“We are actively exploring ways of softening the edges of a revenue-based tax,” Tim Power, deputy director of the U.K. Treasury’s corporate tax team, said at a June 22 International Fiscal Association event in London. These considerations include “thinking about how we might incorporate measures of profitability within the tax, or taking into account the recipient’s circumstances,” he added.
Internet-based companies’ lack of physical presence, together with how they often derive huge profits from user-generated value, have created issues for tax authorities across the globe.
Power’s comments come after the U.K. government backed away from its proposal to introduce an interim, revenue-based tax on internet companies at a recent meeting between European Union finance ministers, Bloomberg News reported April 28, citing officials familiar with the discussions.
Fewer than six months before that meeting, the U.K. had said it was ready to take individual action on interim measures for these businesses in the absence of a global consensus for long-term reform. In a March 2018 paper, the U.K. Treasury then provided further detail on how it may tax internet-based companies’ revenue, echoing efforts already made by countries including Italy and India.
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 U.K. Treasury and Her Majesty’s Revenue and Customs, the country’s tax agency. For them, the interim measures are “a way of incentivising other countries and businesses to come to the table.”
Globally, lawmakers are currently split on how to tax online companies like Alphabet Inc.’s Google.
The Organization for Economic Cooperation and Development is aiming to find worldwide consensus on the issue in 2020. Ahead of that date, however, the European Commission proposed in March a 3 percent sales tax on social media and search engine companies, and online platforms like eBay Inc.
A commission memo said the measure would protect the EU’s competitiveness, raising as much 5 billion euros ($5.8 billion) a year. It added that the levy would remain in place until member states achieve more wide-reaching action to reform how countries allocate and tax digital companies’ profits. The levy applies to businesses with annual EU revenue of more than 50 million euros.
Policymakers 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.
Since March, though, some member states have pushed back against the commission’s proposal.
Smaller countries, such as Luxembourg and Ireland, have argued that the bloc risks putting itself at a competitive disadvantage unless a global deal is reached on the taxation of the digital economy. The opposition is significant as the commission needs member states’ unanimous approval on tax issues.
The U.K. Treasury originally flagged the option of introducing a revenue-based tax for digital companies in a November 2017 policy paper, published with its Autumn Budget for that year. At the U.K.’s Spring Statement in March 2018, the U.K. Treasury then issued an updated policy paper.
The world’s four largest accounting firms have warned the U.K. Treasury against the move, which stems from a desire to make internet-based companies pay a “fair” share of corporate tax.
In its policy papers, however, the Treasury has stressed it would try to minimize negative side-effects. 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 in November.
The “preferred and most sustainable solution to this challenge is reform of the international corporate tax framework to reflect the value of user participation,” the Treasury said its March 2018 paper. However, “in the absence of such reform, there is a need to consider interim measures such as revenue-based taxes.”
With assistance from Viktoria Dendrinou and Piotr Skolimowski (Bloomberg)
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