UK doubles down on White House irritation with digital sales tax

With the UK already testing the strain on its special relationship with the US following the Huawei decision, the introduction of a 2% digital sales tax is hardly going to help matters.

Although the introduction of such a tax has been in the works for some time, the timing could be better. It will certainly aid the UK Government, just as it announces expensive support measures for SMEs in the 2020 Budget statement, but the easily irritated US President might have a thing or two to say in response.

The new digital sales tax was not mentioned during Chancellor Rishi Sunak statements today, but there was plenty of reason for the UK Government to want to secure additional tax revenues. A £5 billion emergency fund will be offered to the NHS, a £500 million hardship fund will be created for councils in England and business rates in England will be abolished for firms in the retail, leisure and hospitality sectors.

The two are of course not related, the UK would have most likely pursued the digital sales without the extra expense associated with the coronavirus outbreak. From April 1, firms where revenues exceed £500 million worldwide, £25 million of which would have to derive from the UK, and operate either a social media, search engine or online marketplace service will be subject to the 2% digital sales tax.

And while the US Government might protest to such a prospect, it is of course very fair and reasonable. Tax laws were created for the analogue era, meaning many digital businesses today can bend around the rules, derive value from their interaction and engagement with a user base but shifting tax responsibilities to a more favourable market. It leaves some Governments out of pocket for no other reason than legal loopholes and creative accounts finding work arounds.

While it is perfectly logical for a company to pay taxes in the country where it creates value and profit for itself, President Donald Trump has been a very vocal opponent. According to the Commander in Chief, this is an attempt to raid the successful US economy. When you add the digital sales tax to the Supply Chain Review conclusion, the UK/US trade talks might be somewhat of a tense occasion.

The last time UK and US representatives faced-off over the concept of a digital sales tax at the World Economic Forum in Davos, Steven Mnuchin, the US of the Treasury, suggested it was a discriminatory tax directed towards the digital fortunes of the US. Mnuchin even went as far as to suggest there would be a retaliation from the US.

The UK is of course not alone in its pursuit of a fair and reasonable tax system, designed for the 21st century. France has introduced its own 3% digital sales tax, as has Italy. In response, the US has been targeting French cheese and fashion for trade tariffs, while it would surprise few to see something similar levied towards the Italians.

Although Silicon Valley will feel the pinch of the new sales tax more than anyone else, perhaps the US politicians need to appreciate this is not an act of aggression towards the country. It the statements of opposition, the US feels it is a victim of European bureaucratic oppression, but it is not. This is not a tax directed towards US digital companies, but towards the tax dodgers in the digital economy, some of whom are headquartered in the US.

These companies are a victim of their own success and shadiness. If the tax avoidance was not done to such an extreme level, these governments probably wouldn’t feel the need to pursue so aggressively. Instead, these companies, who could be based anywhere around the world, wanted to have their cake and eat it. That’s not how the real-world works, eventually it catches up, just like it has done so here.

US unveils retaliation for French Digital Sales Tax

The US Trade Representative (USTR) has begun the process of targeting French cheese and fashion for trade tariffs in retaliation for Digital Sales Tax imposed by France.

While the vast majority of countries around the world feel a fair and reasonable taxation regime against technology companies would be a rational approach, the US Government has decided this is an attack on the US economy. Ironically, the US is accusing Europe of protectionism when US policies over the last few years have been the perfect example of how to define the term.

Looking at these tariffs, cheese and other diary products are the main focus of the 63-strong list, although French fashion businesses have also been targeted. Interestingly enough, sparkling wine has been included on the list, but no other types of wine.

Although such imports are daunting for the moment, this is a public consultation. Official action will take place, should the US continue down this path, over the coming months. The USTR has argued the Digital Sales Tax unfairly targets US companies.

“USTR’s decision today sends a clear signal that the United States will take action against digital tax regimes that discriminate or otherwise impose undue burdens on US companies,” said Ambassador Robert Lighthizer.

“Indeed, USTR is exploring whether to open Section 301 investigations into the digital services taxes of Austria, Italy, and Turkey. The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets US companies, whether through digital services taxes or other efforts that target leading US digital services companies.”

The key difference between the policies of France and the US seem to have been completely missed by Lighthizer, and perhaps it is worth revisiting the definition of ‘protectionism’.

Protectionism (noun) the theory or practice of shielding a country’s domestic industries from foreign competition by taxing imports

France is not protecting its own domestic economy through the introduction of the Digital Sales Tax, it is attempting to make its own taxation rules fit for the digital era. These regulations were written in previous decades, where the idea of digital was only a glint in Bill Gates’ eye. These policies are designed so digital companies, all digital companies not just US ones, are not able to shift profits to tax havens to avoid paying a fair and reasonable rate back to the societies who are fuelling the monstrous growth.

On the other hand, President Trump has been actively engaging in protectionist policies against the Chinese, Canada and Mexico. This is the latest effort, though it has been suggested here that Austria, Italy, and Turkey are also in the firing line. One would suspect the UK, with its own approach to digital tax, is also being discussed behind closed doors, while the Czech Republic has also been making similar noises.

What is worth being noted is that the US internet firms will feel the greatest impact from the French Digital Sales Tax, which will only apply to companies with sales in excess of €25 million in France and €750 million globally. There are other companies which will fall into this category, Sweden’s Spotify for example, though this is not targeting the US, it just so happens US companies are the biggest proponents of creative tax strategies which bleed value out of a society, offering nothing in return.

Some sceptics might also suggest this has the right ingredients to create a new trade war. As the French Government believes it is being reasonable with its evolutionary digital tax regime, might we see retaliation for these import tariffs? This is exactly how the Chinese trade war began, though one would hope there is a more reasoned approach this time.

Ultimately this aggressive approach to international relations from the US Government will only end up as a net-loss. The world is heading towards a globalised economy, and the US is fighting back with Trump’s isolationist policies. Should these tariffs stay, good will only be more expensive for the consumer. Steel is an excellent example of this.

When Trump announced tariffs on imported washing machines, Whirlpool CEO Marc Bitzer was buoyed by the news. Six months later, the firm slashed its earnings outlook blaming tariffs placed on steel imports. Bitzer suggested steel in the US was now 60% higher than the rest of the world, impacting Whirlpool’s ability to offer cost effective goods to US consumers.

The White House might suggest that import taxes would force consumers to buy US products, but these products will be more expensive as soon supply chains and raw materials will be hit by the tariffs. You also have to take into account more stringent labour laws in the US, which will once again increase the price of goods.

Tariffs and protectionist policies do not create wealth and prosperity for the consumers of the aggressor. Trump doesn’t seem to understand the fundamentals of diplomacy, instead taking the aggressive and brash Wall Street approach to doing business to the Oval Office. The US is isolating itself and with Lighthizer promising further 301 investigations, it could be a sticky situation for the US consumer before too long.

Czech Government slaps 7% digital sales tax on Big Tech

The Czech Government has become the latest to challenge the ‘creative’ tax strategies of Big Tech with the proposed introduction of a 7% digital sales tax in the country.

With the UK and France setting the standard earlier this year, several other European nations are starting to make similar noises to ensure Big Tech do not continue to dodge the tax man. In the absence of a bloc-wide approach to taxing digital bounties, the Czech Government is seeking to introduce a 7% digital sales tax, according to Reuters. The tax will be applicable from June, if it passes the final legislative hurdles.

Alongside the Huawei debate, Europe is heading towards a political collision with the US. Many would see these digital sales tax as a fair and reasonable position, forcing Big Tech to contribute back to the societies which have fuelled growth, but this is not the position of the White House. President Trump considers the tax as an attempt to raid the US economy for profit.

The proposed tax would be applicable to companies which generate global revenues exceeding €750 million, as well as turning over more than 100 million crowns ($4.32 million) in the Czech market. The companies would also have to have more than 200,000 Czech users to be subject to the tax.

The final proposals are yet to be approved, though if introduced on the planned deadline it would generate 2.1 billion crowns ($86 million) in tax during 2020, and approximately 5 billion crowns ($216 million) in the years following.

While it is not a perfect situation, individual European states are moving forward with digital sales tax proposals. Ideally, there would be a bloc-wide approach, though thanks to the power of veto this is unlikely ever to happen. The likes of Ireland and Luxembourg are offering the tax havens to Big Tech, securing very attractive deals at the expense of European ‘partners’.

It is encouraging to see Governments taking a firm position against Big Tech. For too long, these companies have made use of expensive lawyers to slip between the cracks of regulation, taking advantage of the plight of regulators and the speed of technological progress. Big Tech has abused the grey areas to insult the very societies which fuel profits.

Fair and reasonable tax is a fair and reasonable position to create, and it seems European Governments are finally fixing a broken mechanism.

Italy readies itself for tax assault on Silicon Valley

The Italian Government is preparing to join the UK and France in taking a tougher tax stance against Big Tech with the introduction of a 3% sales tax.

Designed to target the elusive technology giants which have been slipping between the mountains of red-tape to take advantage of cheaper tax destinations, the levy will be based against revenues realised in the market as opposed to tax. While it might be possible to move profits to different markets in the bloc, it is much more difficult to disguise payments taken from individuals who physically reside in Italy.

While it still might be early days in tackling the abuses of the taxation landscape, momentum is starting to gather. According to sources, the new tax regime could be announced during the next budget and set in place January 2020. The new budget from the coalition is due to be submitted to the European Commission today [October 15].

Although details are relatively thin for the moment, take any predictions or leaks with a pinch of salt. It would be fair to assume Italy is heading down the same route as the UK and France in holding Silicon Valley accountable to a fair and reasonable tax position, though due to the complicated political situation in the country, what form this could take is unknown for the moment.

During the 2018 Italian election, no political group or party won an outright majority resulting in a hung parliament. Numerous coalition governments could have been formed, and after a few failed attempts, the centre-left Democratic party and the anti-establishment Five Star Movement were sworn in last month.

These policies have been in the works for some time now, though what eventually comes out of the wash remains to be seen. Interesting enough, the failure of this latest coalition could force the country into another election, potentially a new government and perhaps a new line on tackling Big Tech.

That said, the only thing which is clear coming out of this political kafuffle is that Silicon Valley is a target.

Across Europe there are several member states who are becoming increasingly frustrated with the flamboyance of the internet giants accounting departments. There are of course a few who have scuppered a pan-European approach to new digital tax rules, the likes of Ireland and Luxembourg of course benefit from the unfair status quo, though with several member states going it alone, the writing is on the wall for Big Tech.

This is just one element of the changing landscape for tech. Alongside a rethink on tax rules, regulation and legislation governing data, privacy, surveillance, free speech, political advertising and artificial intelligence are in the works. Governments and regulators are attempting to drag bureaucracy and the rulebook into the digital era, and it might be a bit uncomfortable for some of Silicon Valley’s residents.