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  • Are Tech Tax Target Tweets for the Birds?

    15 October 2019

    Andy Wood

    Facebook, Amazon, Twitter… Multi-national Digital Enterprises Tax

    I would hardly say I am a native user of social media. I can just about manage LinkedIn but find Instagram, with the wall to wall ‘faking it, till they’re making it’ crowd somewhat baffling.

    However, like many, I often like the occasional dive in to the deepest, darkest echo chambers of Twitter for a bit of entertainment.

    Of course, one of the attractions, and one of the biggest problems with this form of media, is that everyone gets an equal platform – regardless of how learned or, well, less-learned the view.

    Without any sense of irony, a number of contributors have sought to highlight the tax affairs of the very digital brands which enable them to broadcast their views to a global audience. A number of such comments over the last weekend seized upon publication of the latest financial results of one of the very largest tech leviathans, Facebook.

    According to news reports, it had paid £28 million in Corporation Tax having posted record British sales of £1.6 billion.

    Perhaps we shouldn’t really have been surprised at the clamour which accompanies such announcements, yet I was struck by how many individuals compare the enormous turnover which these firms generate with the taxes that they pay.

    They usually fail to appreciate that Corporation Tax payments are based on the profits not sales of a company. Indeed, some commentators seem to deliberately muddy the waters here.

    As I remarked only recently on this ‘blog, the tone of comment on the issue is overwhelmingly negative.

    At a time when politicians are acutely alert to public opinion, it’s not surprising, as a result, to hear the likes of Shadow Chancellor John McDonnell describing the situation as one of “grotesque unfairness”.

    Is he right, though?

    The Future & the Digital Services Tax & BEPS

    There is certainly consensus that we’re at something of a critical juncture in the evolution of the world’s tax system. It is perhaps not surprising that the digital economy has engulfed the existing tax code which was designed to deal with 19thcentury travelling champagne merchants as opposed to Amazon.

    The international response has been too slow.

    Earlier this month, the Organisation for Economic Co-operation and Development (OECD) unveiled plans to shake up tax rules with a particular focus on how multi-national digital enterprises may be moving profits earned from their operations in high tax jurisdictions to low-tax locations.

    The proposals are founded on a structure known as the Inclusive Framework on Base Erosion Profit Shifting (BEPS) or the diversion of profits, to you and me.

    Diverting Profits & Base Erosion Profit Shifting

    Among a raft of bold recommendations, the document suggests re-allocating “some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets”.

    It aims to establish “a minimum corporate income tax on MNE [Multi-National Enterprise] profits” and is a precursor to a major consultation on the issue in December.

    Of course, it’s almost a year since the former Chancellor of the Exchequer Philip Hammond – compelled to act by growing public unease and apparent delays in efforts to secure international agreement on how to respond to the onward march of the tech giants – announced plans for a unilateral Digital Services Tax.

    It is slightly odd that most commentators seem to be either unaware of this piece of legislation or have already come to the conclusion it will not work.

    Whilst his initiative seems to be lost on the twitterati, the OECD has maintained that such action risks undermining “undermine the relevance and sustainability of the international tax framework”.

    The OECD’s Secretary-General Angel Gurría is adamant that “we must not allow that to happen”.

    Remember Diageo & The Google Tax…

    I would be one of the first to acknowledge that the domestic tax system, at least, needs a drastic overhaul. Clients report that it’s simply too long and too complex and, therefore, too likely to trip them up if they’re not careful.

    Account must clearly also be taken – literally, fiscally and metaphorically – of the need to encompass the worldwide activities of Google, Twitter, Facebook, Amazon  and their peers.

    However, in the rush to react to remain in step with angry keyboard warriors, our leaders shouldn’t lose sight of the work already done and the progress already made.

    A year ago, for instance, I spoke to the Times’ Financial Editor, Patrick Hosking, after HMRC had claimed drinks giant Diageo was diverting profits overseas.

    It’s perhaps worth remembering that the Revenue was partly able to make such a challenge after George Osborne introduced the Diverted Profits Tax (DPT) – more popularly referred to as ‘the Google Tax’ – in 2015.

    What happened was that – probably in order to avoid the stigma of being regarded as a tax dodger – Diageo ended up paying an extra £190 million in Corporation Tax.

    In the months since, HMRC hasn’t slackened off, instead launching a unit known as the Profit Diversion Compliance Facility to increase its efforts further.

    Why, then, put another layer of tax law in place when there are already, arguably, effective measures to do the job? Sadly, this is an increasingly common occurrence in out patch-work tax system.

    Leaving the size of its tax bill aside, one might argue that Twitter has a lot to answer for.

    If you have any comments on this article or tax matters in general then please get in touch. You can also read more about tax investigations as well as recent HMRC articles below…