Taxing Big Tech

How to tax big tech firms? This question has been a major source of transatlantic tension and international friction, with various loopholes supporting global tech giants for years. Taxation is currently a hot topic in Europe and understanding and unravelling the complex structures used by multinationals to reduce their tax rates is the aim of the game. These firms make billions of pounds from European citizens every year, yet the tax paid does not reflect the astronomical profits. For example, in the UK, Amazon paid just £14.4m corporation tax in 2019, despite generating a revenue of £13.7bn in the country. In the absence of a complete overhaul of the entire international tax system, a few European nations have introduced new taxes aimed specifically at targeting these companies. The growing frustration directed at tech companies generating profits in countries where they don’t have a physical presence has ensured that digital tax has been a huge talking point, especially since the COVID-19 pandemic. The Organisation for Economic Co-operation and Development has been hosting negotiations with more than 130 countries to reassess the global tax system. The current proposal requires multinational businesses to pay some of their income taxes where their consumers or users are located. The European Union was also planning to propose a 0.3% tax on the goods and services sold online by all companies operating in the EU with annual sales of at least €50m, but this idea has been temporarily shelved. Digital companies have increased their profits during the COVID-19 crisis, yet current tax rules are obsolete and are unable to tax multinational tech companies appropriately. The global tax system needs to be fit for purpose for a digital age, and importantly, needs to be fair and realistic. From a dramatic increase in app use to taking window shopping online, how consumers buy products and services is shifting. The existing international tax system does not properly capture the digitalization of the economy, and the COVID-19 pandemic has brought this huge misalignment into even clearer focus. Tech giants rack up big profits but pay little into government funds. Now things look like they may be shifting. The UK imposed a 2% digital services tax last year – and is far from the only

country to have taken steps to capitalise on taxing companies generating huge sums from online sales and activities, with Austria and Turkey imposing a higher 5% tax. The tech giants are passing on the cost. Google has told its clients that from November it will charge an additional fee for ads served on Google and YouTube further knocking ad spending that has already been hit hard by the pandemic. Amazon also announced it would increase seller fees on its platform. The COVID-19 crisis accelerated the rise of e-commerce and social media marketplaces to a record high and the growth of the digital economy both before and during the pandemic, is showing no signs of slowing down. The digital economy is equivalent to 15.5% of global GDP and is growing two and a half times faster than global GDP over the past 15 years, according to the World Bank. Governments hope to tax the resulting revenue. Nevertheless, after the G20 finance ministers agreed to international corporate tax system of 15%, the EU put its own digital plan on hold. Brussels has delayed campaigns for an EU-wide digital tax that would target tech giants like Amazon, Facebook and Google, after the United States specified that the EU’s levy has been made redundant by the separate, landmark agreement to reform the international tax system. Washington has threatened to enforce unilateral tariffs against EU exports if EU countries go ahead with a digital levy. They believe that the tax would unfairly persecute American companies. While the United States has appealed against the levy on digital sales - likely to hit Silicon Valley giants’ business in Europe - the EU had pledged to introduce the levy if there is no progress in a sweeping effort to tax corporations more consistently. If successful, new tax regimes could make it easier for countries to collect revenue generated within their borders from companies like Amazon, Facebook, Apple. If things don’t go to plan, an amalgamation of digital-specific taxes could trigger trade wars and quash innovation without generating enough money to matter. Ultimately, the aim is to establish a level playing field between traditional and digital business models. There should be no more room for paying low or no taxation, causing market distortions and tax uncertainty.