A recent piece in the Financial Times noted that that eBay’s U.K. subsidiary paid £1.6 million (U.S.$2.11m) in tax last year on revenues of £200 million (U.S.$263.7m) according to figures filed with Companies House, yet its annual report in the United States said U.K. revenues were $1.3 billion. The revenue figure reported in the U.S. filing looks like it included commissions eBay received on sales in the United Kingdom, says the article, but those figures are not included in the U.K. accounts. The article goes on to say that tax experts it consulted say it appears that the U.K. Commission revenue is being routed through the company’s Swiss subsidiary.
This kind of tax avoidance is exactly what the “diverted profits tax,” better known as the “Google tax,” was supposed to capture. In 2015, the government tried to crack down on companies diverting profits overseas to countries with more favourable corporate tax rates, by introducing the Google tax, which taxes at a rate of 25 percent compared with the current U.K. corporation tax rate of 19 percent. The additional tax was called the Google tax following accusations by British MPs of the company’s aggressive tax evasion policies.
Following the tax’s introduction, last year Google agreed a deal with Her Majesty’s Revenue and Customs (HMRC) to pay £130 million (U.S.$171.4m) in back taxes and increase its future tax burden. The deal was not without its controversies, however. Then-chancellor of the exchequer, George Osbourne, claimed the settlement was thanks to his new diverted profits tax (DPT), but the period covered by the settlement was from 2005 to 2015, a period in which the DPT was only in effect for six months. Meanwhile, Google confirmed that its U.K. sales would continue to be routed through Ireland, thus avoiding Britain’s corporation tax.
Despite these two examples of companies failing to change their practices to comply with the new tax regulations, HMRC announced that revenues from Google tax rose from £31 million (U.S.$40.8m) in 2015/16 to £281m (U.S.370.5m) in 2016/17, after 14 companies were hit by the tax.
When it introduced the tax, the HMRC said it expected to raise £1.8 billion (U.S.$2.4b) by 2021, but most of this will be collected as regular corporation tax because companies will have been “incentivised to restructure to avoid coming within the scope of the levy.” In the same way, in the last tax year the amount actually collected from the diverted profits tax was £138 million (U.S.$182m). The remaining £143 million (U.S.$188.6) was secured in corporation tax after companies changed their behaviour and structures.
Other cases are arising, as well. In May, drinks company Diageo announced that it planned to challenge a Google tax bill for about £107 million (U.S.$141m) for the two years to June 2016 on profits that have allegedly been moved from the United Kingdom to the Netherlands. While in June, the High Court dismissed an application by Glencore, the Swiss-based trading and mining company, for permission to seek a judicial review of a Google tax charge for £21 million (U.S.$28m). The number of companies that notified the HMRC they were potentially within the scope of the tax increased from 48 to 145 in 2016/17.
Of course, the decision to crack down on tax avoidance by ecommerce firms is not limited to the United Kingdom. In January this year, Australia said it planned to introduce a Google tax. This was part of the Organisation for Economic Co-operation and Development’s (OECD’s) “Base erosion and profit shifting” project where, last year, 60 countries representing 90 percent of the world’s economy agreed to a package of reforms to curb the worst excesses of tax avoidance by multinationals. The plan took two years to put together and is being rolled out globally. Another report on the issue is due out in spring 2018 from the OECD.
Below are some report objectives from the European Commission.
A comprehensive and modern approach to the taxation of the digital economy is needed to meet the goal of fairer and more efficient taxation, and to support EU growth and competitiveness through the digital Single Market. This approach should be driven by the following objectives:
Fairness – Ensuring that corporate profits are taxed where the value is created. It is necessary to maintain a level playing field and a system that is resilient against abuse so that all companies pay their fair share whether they are large or small, more or less digitalised, EU or non-EU based.
Competitiveness – Creating the right tax environment for the scaling-up of start-ups and businesses to flourish in our Single Market. To improve the competitiveness of the EU, we need to remove existing obstacles and avoid creating new tax barriers to the emergence of new businesses that foster innovation and create jobs.
Integrity of the Single Market – Converging towards a common solution that avoids unilateral measures that would destabilise the functioning of the Single Market. Uncoordinated national measures will lead to fragmentation of the Single Market, further distortions and tax obstacles that will prevent companies from growing and investing in the Single Market.
Sustainability – Ensuring the corporation tax system is future-proofed and sustainable in the long-term. As traditional business models become increasingly digitalised, Member States' tax bases could gradually disappear if the tax rules are not adapted to capture new digitalised business models. If not remedied this will lead to the tax burden being increased elsewhere.
Source: European Commission
The European Union is part of this effort, even though it has no jurisdiction over corporate income tax, which is set nationally and governed by a set of bilateral treaties between countries which also follow a template set out by the OECD. While they are being opposed by some countries in the union, including the United Kingdom and Ireland, the European Union is pushing ahead with plans to rewrite tax rules for technology companies, aimed at increasing governments’ take from the likes of Google, Facebook, and Amazon, regardless of whether they have a physical presence in the country but based on the location of their users and customers.
A report published by the European Commission last month said technology companies paid less than half the tax of other industries. A digital business with international operations pays an effective average 10.1 percent tax rate in the European Union, said the report, compared with a 23.2 percent rate levied on traditional companies. The report also noted that the Digital Single Market now makes up over half the market capitalisation of the EU’s economy, compared to 7 percent in 2006.
A French suggestion to tax revenues rather than profits, which might be more easily located, has won some support, but is not likely to be adopted. In fact, the European Union already has a set of laws that may facilitate a way forward on these challenges: the Common Consolidated Corporate Tax Base proposal. The report says: “the Commission continues to believe that the CCCTB provides an EU framework for revised permanent establishment rules and for allocating the profit of large multinational groups using the formula apportionment approach based on assets, labour, and sales that should better reflect where the value is created.” And, in addition, both the Council and the European Parliament are already discussing developments in the CCCTB to better capture “digital activities” as well as “bricks and mortar” businesses.
Progress toward a full solution to the problem, admits the report, is likely to be slow, thus it suggests some short-term solutions that might be implemented in the meantime. The first is an equalisation tax on turnover of digitalised companies that could be creditable against corporate income tax or structured as a separate tax. The second is a withholding tax on digital transactions and the third resembles the French proposal: a levy on revenues generated from the provision of digital services or advertising activity.