Taxing times ahead for 'big tech'?

Are large online businesses paying their fair share of tax? This was the question debated on Tuesday 27 March by MPs in Westminster Hall, the small debating chamber in Parliament. 

Tabled by Conservative MP Neil O’Brien, the debate was remarkable in the fact that a Conservative backbench MP and eight of his colleagues felt motivated to call for more taxes on companies, which is not the traditional position of right of centre politicians.

O’Brien is a former Special Advisor to both former-Chancellor George Osborne and Prime Minister Theresa May. He has previously also led the influential centre-right think tanks Policy Exchange and Open Europe.

The debate which took place indicated that there a considerable degree of cross-party support for changes to how multinational online businesses are taxed. It was remarkable however in that the debate was dominated by new backbench Conservative MPs elected in 2015 and 2017. This appears to indicated that the topic has clearly struck a chord amongst the younger and more tech-savvy in Parliament.

Concerns for small businesses

The main thrust of the arguments from almost all of the speakers concerned small business. The Conservative MPs focused on the unfairness of small businesses paying business rates regardless of whether they make a profit or not, whilst online companies appear to pay comparatively little tax. O’Brien’s argument centred on the key challenge of this problem: online businesses can circumvent current rules on permanent establishment due to not needing physical assets in a country in order to be commercially active.

It was proposed that a new system could solve this by calculating tax owed on the basis of “user created value.” This relates to how online platforms can make money by selling advertising based on data generated by users. It is therefore argued that it is the user who creates the value for the platforms, and it is this value that O’Brien is proposing to tax. He argued that this could be achieved either by a comprehensive international agreement, or an interim tax to be levied by UK Government prior to such an agreement being made.

The government representative present at the debate, Mel Stride MP, Financial Secretary to the Treasury, reiterated the government’s position that it is looking closely at the issue, and that it is not afraid to act unilaterally in this field if international agreement is not forthcoming.

Given that the government has no overall majority, and that introducing new taxes has not traditionally been a popular position in the Conservative Party, the support of these MPs will be important for the government if it is to pass new laws on the taxation of online businesses. 

Hot topic: Online taxation in the UK and beyond 

These concerns are not just the preserve of a small number of backbench Conservatives, however. Spurred by high profile cases of the “GAFA” (Google, Amazon, Facebook, Apple) paying low levels of tax compared to their very large revenues and profitability and the resulting public and media outrage, governments globally have been signalling moves to correct the current framework.

Key to these reforms is ongoing work by the Organisation for Economic Cooperation and Development (OECD). In particular, the 2015 report on Base Erosion and Profit Shifting (BEPS) set out issues relating to the “Artificial Avoidance of Permanent Establishment Status”. By 2020, the OECD aims to introduce new rules which mean that online businesses are obliged to pay tax in the countries in which they operate in the same way as traditional business models, whether physically present or not. 

However, there are concerns that this work will struggle to be as transformative as some would hope given the sometimes vastly different views of the OECD countries.

European governments are leading the way

The UK is one of the countries which is starting to develop its own policies outside of the international negotiations. The government recently updated its position paper on taxation in the Digital Economy, which argued that, whilst an international settlement on digital taxation remains the government’s preferred option, interim solutions such as a revenue tax will be examined.

France has also emerged as one of the loudest cheerleaders for this type of tax and will be key in progressing action at EU level. Slovakia, Hungary and Italy are all also in the process of establishing national taxes on digital revenues.

The Commission’s response

The European Commission has recently unveiled two proposals for the taxation of the digital economy, one of which is an interim solution for a tax on revenues of certain digital activities. It appears that the UK may be making a departure from the its usual position as the ‘pro-business, anti-regulation’ member of the EU, given its position on digital tax is quite close to the Commission’s proposals.

The Commission’s proposed interim measure, the “Digital Services Tax”, would apply to the most “urgent gaps and loopholes in the taxation of digital activities”, and would seek to ensure the Commission stays ahead of the threat of regulatory fragmentation in this area. The 3% tax on revenue would be applicable to digital platforms that facilitate interaction between users and services where the main value is created by user data. It would only apply to companies with annual worldwide revenues of €750 million and EU revenues of €50 million would be subject.

If agreed by the Member States as proposed, the tax would apply until a longer-term solution can be sought.  

The Commission’s second proposal is a longer-term, more ambitious, goal to reform permanent establishment rules to more accurately capture the value generated by online businesses, through a calculation of digital activities and user base 

Companies would be considered to have a “significant digital presence” if they:

• generate more than €7 million in annual revenues from digital services in a Member State;

• have more than 100,000 users who access its digital services in a Member State in a taxable year; or

• secure over 3,000 business contracts for their digital services in the tax year of the Member State in which they are present. 

Harsh reality

While this is certainly a bold move by the Commission, and clearly there is a receptive audience amongst some Member States, the usual suspects of Ireland, Luxembourg and Malta are likely to hold up this process in the next Council and European Council meetings. Given that the proposals would require unanimity, this significantly increases the chance of measures being watered-down or even shelved.

Countries like Ireland would be the amongst the biggest losers as a result of the Commission’s long-term proposal. Large tech companies set up their headquarters in Dublin to pay the low-levels of corporation tax. Should taxes be based on “significant digital presence”, the Irish government could lose significant tax income from European revenues that are currently funnelled through Irish subsidiaries of multinationals. However, given its reluctance to levy taxes on companies like Apple, the Irish Government is likely to be more concerned about the potential loss of jobs and investment which may result from losing one of its key attractions to multinationals . 

The Commission’s proposals have also been interpreted in the media and amongst key OECD countries as being anti-US, due to the headline targets all deriving from Silicon Valley. It is important to bear in mind that the Commission has proposed these measures in the hope the EU’s actions will spur an international response, in line with the consistently cited wish for global reform. Therefore the international reception is key. 

An issue that is not going away

The developing pressure from the Conservative backbenchers demonstrates that the taxation of online businesses is likely to be a concern of the UK Government going forward. In conjunction with the global environment, a significant question which will determine next steps is whether international agreement via the OECD’s work can be reached quickly enough and how well the Commission’s proposals sit with its global partners.

While the differing emerging national policies across Europe could increase support for the Commission’s agenda to prevent further regulatory fragmentation, there will always be those who feel it is not the EU’s right to act in this area, as tax remains an area reserved for national governments.

There was a time when a Conservative government with no overall majority might well have struggled to get new taxes on businesses past its own backbenches. With the support of these younger, tech-savvy Conservative MPs, it is possible that we might see some elements of the government’s position paper being taken forward in this autumn’s Budget, or maybe sooner should the political, media and public outrage reach even great heights.

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Written by Matthew Niblett and Annie Scanlan