An Entente cordiale

Jul 22, 2019

The British and French governments are not known for always seeing eye to eye on matters of policy.  Yet developments last week suggest that they chime on one issue at least – how to extract more money out of these troublesome online businesses. 

Technological advances are rightly hailed but, from the perspective of governments, such advances can also dilute tax revenues.  Tax rules devised when businesses made money primarily from digging stuff out of the ground and making things with it no longer work in a digital age.

The first concerted attempt at international level to regularise the cross-border taxation of companies (developed by the OECD and known as BEPS) scored considerable success in eliminating the use of corporate tax havens.  It reduced the incidence of cross-border transactions designed first and foremost to reduce tax bills, and also ensured that a revenue authority in one country had a reasonably good idea of what their counterparts in other territories were having to tackle. 

It failed however to come up with new methods of taxing the profitability of digital companies.  Even though work by the OECD (known as BEPS 2) is ongoing in devising new rules which most if not all modern economies might buy into, the process is taking just too long for some countries.  Hence the introduction by both the French and the British of new rules for taxing digital businesses – a Digital Services Tax in France passed by the French Senate earlier this month, and draft legislation for a Digital Services Tax for the UK which issued last week. 

The new Franco-English style of taxing digital companies has similarities.  The first of these is that the emphasis is on where the customer is located, rather than where the company is located.  Secondly, rather than attempt to tax profitability, the tax is levied on sales.  In both of these respects, the French and British attempts are more like additional customs duties (which are levied on the gross value of the product) than like traditional corporation tax. 

Another common feature is that these new digital taxes are elitist.  Both the French and the British offerings will apply only to the very largest of businesses with very specific types of business activity, mainly in connection with online advertising.  As a consequence, these taxes will only apply to a small and select group of companies.  It just so happens that most of these companies are American.  The French move has already irritated the Americans so much that the US Trade Representative is launching an investigation into whether or not such a tax constitutes an unfair trade practice.

There is no such thing as an international tax.  However, there is such a thing as an international tax credit.  The treaties which exist between countries to foster international trade by eliminating double taxation recognise that the tax paid in one country can in some circumstances be credited against the tax due in another country.  The British digital services tax legislation specifically rules out this possibility.  The tax will be a UK charge exclusively, and unavailable for offset against any other claims to tax at home or abroad. 

From a domestic political perspective therefore, it is hard to quibble with the thinking behind introducing such levies.  It involves taxing (mainly foreign) companies which don’t vote, partly at the expense of the exchequers of other countries.  That point is underlined by some reports which have suggested that only one French company, Criteo, will fall liable to the new French tax.   

I do not expect to see widespread public sympathy for the multinational giants – the likes of Google, Amazon, Facebook and Apple – who are likely to be the most affected by these charges.  Then again, the additional tax yields will not be colossal.  The UK Treasury, for example, suggests that the UK digital services tax will yield in the order of £1.5bn over a four-year period.  That is not a small number but in the overall scheme of things the UK collects £650bn a year in tax anyway. 

The new British and French rules though are bound to cause dismay among the other G20 member countries.  They are, by and large, supporting the OECD's attempts to come up with a common solution to taxing the digital economy, rather than allow a wide variety of national levies to emerge.  Remember that the corporation tax system for multinationals fell into disrepute in the first place largely because of a lack of international coordination over many decades. 

Will all this make any difference to non G20 members like Ireland?  The Irish Revenue Commissioners calculated that digital taxes, as originally envisaged by the EU commission, could cost us up to €160 million a year.  At this stage that calculation is probably off the point.  The real impact of the taxation of digital companies is not their immediate impact on Exchequer returns, but rather the effect these new levies will have on where companies might decide to locate.  I'm not sure that this can be predicted with any certainty. 

Where it may make a difference is in the pockets of consumers where tariffs on sales of any type often land.  A study carried out by Deloitte on the impact of the French digital tax suggests that 55% of the total tax burden will be borne by consumers, 40% by businesses that use digital platforms, and only 5% of the burden will be carried by the large internet companies targeted.

That's the problem with tax that finance ministers sometimes choose to ignore.  Whatever type of levy gets charged on a company, it is difficult to predict where the burden will ultimately land.  At least we may now have the examples set by the common approach of the French and British to learn from.

Dr Brian Keegan is Director of Public Affairs at Chartered Accountants Ireland