Dealing With Digitax: The double-edged sword of a UK digital services tax

September 4, 2019

2 min read

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What's going on here?

French President, Emmanuel Macron might have emerged as the superstar of digital taxes after the recent G7 meetings, but the UK is catching up, with provisions that will divide the British technological, financial, and legal landscape.

What does this mean?

The governments of large European countries have been criticised for failing to tax the profits of multinational tech companies, believed to stem from their jurisdictions. Facebook, Google and Amazon are all currently registered in low-tax countries like Ireland and Luxembourg, independently of the origins of their revenue.

The failure to reach an EU-wide agreement on taxing big tech companies, initiated by Macron, has led the French government to impose its own unilateral tax – a 3% tax on revenue from digital services earned by firms with more than 25 million euros in French revenue and 750 million euros worldwide.

Nevertheless, Trump described Macron’s move as malicious punishment to US tech companies for their commercial success, deteriorating the already bitter US-EU economic relations. Low-tax EU jurisdictions, such as Ireland and Scandinavian states, also show a lack of willingness to collaborate with Macron, fearing a decrease in foreign investments.

Why should law firms care?

The UK is also introducing the tax because it became frustrated by the slow progress of G7 and G20 negotiations, and the failed EU attempts to agree on taxing digital companies.

The proposed UK measure goes out for consultation until September 5 and applies a 2% levy on the revenues of search engines, social media platforms and online marketplaces serving UK customers. The tax would be applied only to companies with global revenues in excess of £500m and revenue of £25m from UK activities. Companies with low global profit margins would either pay a lower rate of tax or be exempt if they could demonstrate their operating profit margin on UK business was zero or below.

This targeted and proportionate digital services tax is designed to keep the British tax system in this area both fair and competitive, ensuring that established tech giants, rather than start-ups, shoulder the burden, prior to a longer term international settlement.

But to some, the planned change in April 2020 seems too rushed for businesses to adjust, causing a lack of clarity in the British tax landscape.

One problem with the draft tax legislation, is that the burden of determining whether freelancers should be classified as employees for tax purposes is going to be shifted from the individual to the business that employs their services. In practice, many freelancers might be paying into the system like employees but will be denied any of the protections that go with employment.

Another controversial element of the legislation is a rule that would hold directors and others involved in tax avoidance, evasion, or company phoenixing, jointly and severally liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency.

Apart from the domestic upheaval that may occur if the digital services tax stifles UK businesses beyond those that it is intended to target, the international backlash remains to be seen, given the vehement disagreement from the part of the US.

Report written by Vasiliki Poula

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