The United States is prepared to act if the United Kingdom and other countries press ahead with digital services taxes (DSTs), which are attempts to grab extra revenue, according to a top House taxwriter.
House Ways and Means Committee Chair Kevin Brady, R-Texas, on October 31 said the United Kingdom’s recent budget proposal for a DST targeting cross-border digital services was troubling. “Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab,” Brady said in a statement.
Unilateral measures that will lead to double taxation shouldn’t preempt ongoing discussions at the OECD level on how to handle the tax challenges of digitalization in the long term, according to Brady. “If the United Kingdom or other countries proceed, that will prompt a review of our U.S. tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets,” Brady warned.
U.K. Chancellor of the Exchequer Philip Hammond on October 29 proposed a 2 percent DST on profitable digital business models, including social media platforms, search engines, and online marketplaces, that generate at least £500 million in annual global revenue. The tax would apply to U.K.-generated revenues directly linked to U.K. user participation and would take effect in April 2020. Hammond said during his budget speech that the U.K. government would continue to participate in international discussions on taxing the digital economy and would consider adopting an internationally agreed-upon solution instead of the DST, should one emerge from OECD discussions.
The U.K. DST is similar to one that many EU member states are trying to agree on, which would be levied at a rate of 3 percent on activities involving high user participation. That tax, which the European Commission proposed in March along with a long-term “significant digital presence” concept, would apply to companies with annual worldwide revenue exceeding €750 million and total annual revenue from digital activities in the EU exceeding €50 million.
Brady’s statement comes shortly after a group of European digital businesses sent a letter warning about the EU DST to EU finance ministers, EU Tax Commissioner Pierre Moscovici, and Valdis Dombrovskis, the commission’s vice president of the euro and social dialogue. In the letter, dated October 29, businesses including Spotify and Booking.com said the proposed DST raises several serious problems, including potential retaliation from non-EU countries. “The unilateral approach, inherent in the proposed DST, could draw counter action from third countries, including adverse and arbitrary taxation of European company revenues in those jurisdictions,” the businesses wrote.
Not only would the DST result in double taxation, but there is also uncertainty about whether it would be a direct, hybrid, or indirect tax, and whether it would be in line with domestic law and tax treaties, the businesses said, echoing similar concerns from a German Ministry of Finance advisory board and even from the EU Council Legal Service. Even though it’s designed to target large and high-profit companies, the tax would disproportionately affect European companies, resulting in unfair treatment, the letter adds.
There’s a lack of consensus both internationally and within the EU on how to define a tax base comprising user contributions to digital platforms, and “it is unclear how companies would ensure accurate tax collection and reporting while remaining compliant with European data protection and privacy laws,” the letter says. Instead, the companies urged the EU member states to continue engaging multilaterally to find an internationally agreed-upon solution to tax digitalization, and to abandon the DST, which they said would be “counterproductive and a detrimental step backwards.”
“Commissioner Moscovici has made it crystal clear in all of his contacts with interlocutors that our proposals are nationality- and company-neutral,” a commission spokesperson said in a statement emailed to Tax Notes, adding that a global answer at the OECD is what the EU would prefer and will continue to work on.
“We welcome the fact that the U.S. also wants to work on having an international solution in place as soon as possible,” the spokesperson said. “This is why we will support all efforts to agree already at the Buenos Aires G-20 summit this year on moving the work within the OECD forward as much as possible in order to have options for common decisions already at the 2019 June G-20 summit in Osaka, instead of waiting until 2020.” The OECD has said that it hopes to present some more concrete options by the time G-20 finance ministers meet in June.
Brady’s statement is certainly a “shot across the bow,” according to Robert J. Kovacev of Norton Rose Fulbright US LLP. The phrase “blatant revenue grab” is strong language, but accurately describes the U.K. DST proposal, he told Tax Notes. “In light of Brexit, the U.K. needs all the friends it can get, so this comment could be seen as a pointed warning not to test the U.S.’s willingness to retaliate,” Kovacev added.
However, there’s a hint at a compromise because “the statement implicitly endorses the OECD attempt at consensus, suggesting a solution to taxing the [digital] economy may eventually be welcomed” in the United States, Kovacev said.