Tech sector bodies are calling for a “new impetus” from the US, the European Union (EU) and the UK to agree a common approach to taxing the digital economy following the election of Joe Biden as US president, arguing that divergence in national digital tax regimes could spark trade disputes.
According to a joint letter signed by TechUK, the City of London Corporation, Allied for Startups, the Developers Alliance and the Computer and Communications Industry Association (CCIA), the Covid-19 pandemic has shown the importance of digital services to the modern economy, from video-conferencing technology to e-commerce.
“To return to growth in 2021, the US, the EU and its member states and the UK are rightly seeking to put technology at the heart of their response with myriad initiatives aiming to unlock the potential of digital services to drive economic growth and job creation,” the letter said.
“However, to ensure the best possible recovery, we need predictable and stable rules around taxation and investment. A renewed emphasis on US and European cooperation presents a window of opportunity to tackle unresolved issues on cooperation in taxation at the OECD [Organisation for Economic Cooperation and Development].”
The US has long been opposed to an international digital services tax (DST) on the basis that it discriminates against US companies, while proponents of the tax see big technology firms such as Google and Amazon massively benefiting from local markets while making only limited contributions to the public purse.
On 7 April 2020, The Guardian reported that Google paid only £44m in UK corporation tax in 2019, despite its staff earning an average of £234,000 each.
In October 2019, it similarly emerged that Facebook had paid £28m in UK corporation tax in 2018, while recording record sales of £1.6bn that year.
The letter added that, as the hosts of the some of the world’s biggest digital sectors, the US, the EU and the UK are well placed to drive international DST discussions to a conclusion.
“This is vitally important as the proliferation of national digital taxes threatens to spark trade disputes that could undermine our collective efforts to recover from the Covid-19 crisis, as well as threatening a renewed atmosphere of partnership,” it said.
In the UK, a national DST came into effect in April 2020, which applies to search engines, social media platforms and online marketplaces with global revenues of more than £500m, where more than £25m of this is derived from UK users.
The tax is specifically designed to address “a misalignment between the place where profits are taxed and the place where value is created”, and therefore targets the profits of large multinational enterprises that fall within its scope. US companies are set to start paying the tax early this year.
France passed legislation creating a national DST in July 2019, imposing it at a rate of 3% of the gross revenues derived from digital activities related to French users. Finance minister Bruno Le Maire said at the time that France would only withdraw its DST if and when a decision is made at the OECD level.
At the start of June 2020, US trade representative Robert Lighthizer launched a probe into whether the digital tax measures being adopted or considered by other countries amounted to an unfair trade practice.
Under US law, this would allow Washington to unilaterally place tariffs on imports from “offending” countries.
Later that month, the US suspended DST talks with European countries, with US Treasury secretary Steven Mnuchin telling the UK, French, Italian and Spanish finance ministers that discussions had reached an “impasse” and that “the United States remains opposed to digital services taxes and similar unilateral measures”.
Mnuchin added that the US will “respond with appropriate commensurate measures” if countries choose to unilaterally collect or adopt such taxes.
But in late January 2021, the Biden administration’s Treasury secretary, Janet Yellen, indicated her support for international cooperation at the OECD on the issue of DST in initial bilateral calls with her European counterparts.
TechUK CEO Julian David commented: “There is a window of opportunity to build international consensus on the taxation of the digital economy with a new administration in the White House, a renewed emphasis on US and European cooperation and the upcoming G7 conference, which will be hosted by the UK.
“By driving forward the establishment of a common framework, the US, EU and UK can not only resolve one of the great economic quagmires of our time, but also support a renewal of multilateralism and its ability to tackle the great global challenges.”
The signatories to the letter represent more than 1,000 organisations across the US, UK and EU, as well as startup representatives from 33 countries and a network of 70,000 software developers.