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U.K. to introduce the first-of-its-kind Digital Tax



LONDON – The UK said it will proceed with the introduction of a first tax on locally generated revenues of large technology companies – the most concrete attempt by an industrial nation to rewrite the world's tax laws the digital age

The new tax is coming as dozens other countries consider similar charges on digital services provided by companies such as

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Google and

Facebook
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These governments hope to generate more revenue from such services as economic activity increasingly shifts online.

It's about how governments are collecting taxes on tech companies, many of which are based in the US and have become global, digital consumer goods giants. As they have grown, governments outside of their home regions are struggling with the digital nature of their goods to raise a reasonable level of local taxes.

Large American technology companies have been criticized for reporting relatively little of their profits to local jurisdictions to bring them under control. An international effort among rich nations to help standardize how and where to tax these digital services is progressing slowly. The United Kingdom said Monday it could not wait any longer. As part of its annual budget, she said she would start the plan to create a digital tax for large technology companies by 2020.

The Spanish government has proposed a similar tax on digital services this month, but it is parliamentary approval

The new British tax is putting large countries, including the US, under pressure to accelerate global efforts. The Organization for Economic Cooperation and Development, a forum of wealthy countries, has held international digital tax talks.

Opponents of digital taxation, which includes lobbyists for multinational companies, say that a patchwork of new rules that vary from country to country will hurt smaller companies. They say the initiatives could lead to double taxation of corporate profits that would hamper international trade and deter investment.

The technology industry rejects the proposals. On Monday after the UK announced its plan, the Information Technology Industry Council, a Washington, DC-based lobby group representing technology companies such as Google and Facebook, said that "the introduction of a digital tax has a deterrent effect on UK investment could and hinder companies of all sizes from creating jobs. "

British Finance Minister Philip Hammond said on Monday that the tax targets only large, profitable companies with a global income of at least £ 500 million ($ 641

million) , The new levy would represent 2% of the revenue of such a company in the United Kingdom. Mr Hammond said it could potentially contribute £ 400 million a year.

The proposal would affect companies that generate UK revenue from services including search engines, social media platforms and online marketplaces. This makes the ad-selling businesses of Google and Facebook particularly vulnerable. The tax would not affect the sale of digital music or movies.

For giants like alphabet,

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and Facebook would lead the UK tax to a relatively small additional tax. But it is the first concrete step among several governments worldwide to increase the tax burden of this and other large, global tech service companies.

"It's clearly unsustainable or fair that digital platform companies generate substantial value added to the UK without paying taxes," Hammond said Monday. He said that while a global agreement was "the best long-term solution, progress has been painfully slow". The UK said its new tax would only be in effect until a global solution is found, but Mr Hammond said "we can not just talk forever."

Great US technology companies have been extensively audited here, such as a lot of taxes they pay. Amazon UK Services Ltd., one of the online retailer's largest UK units, reported sales of £ 1.98 billion and pre-tax profit of £ 72.37 million in 2017, but only paid $ 1, according to Companies House £ 7 million for British taxes. a Register of Company Information

The British Facebook subsidiary reported sales of £ 1.26 billion and a profit of £ 62.76 million in 2017, paying £ 17.19 million in taxes this year , Google UK Ltd. achieved sales of £ 1.26 billion and profit from operations of £ 200.55 million for the year ended June 31, 2017. It paid £ 47.36 million in British taxes.

Speakers for Amazon, Facebook and Alphabet had no immediate opinion on the new tax. Despite the criticism of their tax practices, all three companies have stated that they are paying their fair share.

Critics also said that the British government's movement could result in retaliatory taxes in the US. They also said that tech companies could simply pass the tax on to their customers

The US Treasury did not immediately comment on the new tax.

"This proposal could have a disproportionate impact on US companies and ultimately affect the United Kingdom's trade commitments," said Rufus Yerxa, president of the US National Foreign Trade Council. "If adopted, this measure could also complicate the UK's desire for closer US-UK trade relations."

However, some smaller British technology companies welcomed the proposal as a way to become more competitive with the giants of Silicon Valley.

The UK first said it could create a new tax in November 2017, as digital service users help to create the product that technology companies sell to advertisers and other customers. This principle has influenced the rest of the European Union, which is working on its own tax proposal.

Inspired by separate proposals by the European Union to levy a tax on the revenues of technology companies instead of their profits, South Korea, India and At least seven other Asia-Pacific countries are investigating new taxes. Mexico, Chile and other Latin American countries are also considering new taxes to increase the revenues of foreign tech companies.

Britain's efforts underscore the complexity of such a tax. The UK's Financial Services Authority, Office for Budget Responsibility, said the Treasury's estimate of how much tax the new levy will impose is highly uncertain. One of the outstanding questions about the structure of the new taxes is whether they are, for example, deductible from corporation tax. The regulator also highlighted a number of ways in which the new tax could affect corporate behavior to minimize any liability, such as: B. Reclassification of income as income not covered by the tax.

Service tax could be a bigger source of finance for Treasury than preliminary estimates suggest, as online activity accounts for a growing share of the economy as a whole.

Write to Paul Hannon at paul.hannon@wsj.com and Nina Trentmann to Nina.Trentmann@wsj.com


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