Digital services tax issues rear their head

Many companies have been badly hit by the effects of the pandemic. However there are some sectors which have some notable exceptions to this general rule. Digital services are amongst the foremost of such examples. Companies such as Amazon have seen buoyant activity levels throughout the pandemic. Others such as Google have also seen high demands for their services, especially given the number of people who have suddenly switched to working from home and rely on Google and similar providers for information and connectivity. Some companies, such as Zoom, have seen their businesses become hugely popular as a result of the need for people to interface remotely rather than face to face. In the case of Zoom it has become in some parts of the world a household name in contrast to its pre-pandemic exposure.

This is of course excellent news for these companies. It is in some ways reassuring to see examples of organisations that are bucking the general trend and seeing their revenues not only holding stable but also increasing. However in the process it brings to the fore an ongoing issue which long predates the pandemic, namely how should these companies be assessed for tax purposes? This is an issue which has been with us for all of the last decade and probably beyond. In the UK in the past senior officials of companies such as Amazon and Google have been summoned to appear before the Public Accounts Committee (PAC) to explain why they are paying such low levels of tax. The answer has been that this is to do with where their businesses are primarily located. In Amazon's case for example their main European headquarters for tax purposes was stated to be in Luxembourg. Luxembourg is a small European country and most of Amazon's European business is performed outside of the country in terms of where their products were sold and delivered. But by basing themselves for tax reasons in Luxembourg Amazon were not breaking any laws. This highlights a major problem in existing tax legislation as far as international service provision of digital services is concerned. Similar cases reinforce the nature of the problem. Another prominent example concerned Apple who were found by the European Commission to have been in receipt of unfair tax advantages from the Republic of Ireland and heavy fines were issued as a result. A mega-fine of €13 billion plus interest was issued though appeals against this sentence were then launched.

The problem is that international tax laws are now about a century old. In summary, tax obligations under the existing system are worked out based on the physical location of a company's headquarters and trading activities. This worked very well when activities were delivered physically. If a company provided goods or services in one country, then generally speaking that's where it paid its tax on those transactions. But this system is no good when digital services are provided. Where exactly in such cases is the provision of services taking place? Is it in the country receiving the goods or is it where the providing organisation is based for tax purposes? Currently, generally speaking it is the latter and that means there is a major mismatch between the country location of recipients of services and where those services are actually provided.

Steps to address this anomaly were already underway before the pandemic came along. The Organisation of Economic Cooperation and Development (OECD) was already undertaking a review of legislation with the aim of providing the template for an updated and more fit for purpose international tax framework in the age of digital services. Not surprisingly perhaps, given the current nature and extent of the crisis, the report has been delayed. However, given the economic fallout attendant upon the pandemic there has been, according to the OECD, 'a renewed appetite for a number of countries to implement' the new so-called GAFA tax. If you are unclear as to what GAFA stands for, explaining the acronym gives a very clear idea of where this tax is aimed. GAFA stands for Google, Amazon, Facebook, Apple. The prime targets of any revised tax legislation framework are there for all to see.

Analysts reckon that post-pandemic such tech giants are likely to be prime targets indeed for governments in many countries. They are one of the few sectors to have profited from the pandemic and as such it could be argued that the imposition of windfall taxes on what might be considered excess profits is fully justified both morally and economically. Despite this logical argument, don't expect such taxes to be issued and paid without a major fight. Not only is the corporate power of these giants individually and collectively enormous but it should be noted that they are all American companies. The US government is opposed to the imposition of a more rigorous tax regime targeted primarily at what are effectively their own constituents. Whilst the case for levying high levels of tax appears unarguable in these cases, expect it to take a number of years before governments around the world get close to seeing any major increases in revenue from this general direction.

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Wayne Bartlett is an author for accountingcpd. To see his courses, click here.