The fate of the U.K.'s tax on large tech firms mainly depends on conciliation with the incoming U.S. administration and progress on a multilateral agreement at the Organisation for Economic Co-operation and Development, experts said.
Implemented in April, the government's 2% digital services tax applies to social networks, internet search engines and online shopping sites with U.K. revenue of £25 million or more. The government has said it will remove the tax once a global solution on digital taxation is reached. According to the OECD, that could happen by the middle of 2021.
Experts are conflicted on whether years of deadlock on the issue can be resolved in the new year. Ahead of President-elect Joe Biden's inauguration in January, the mood in Europe is one of transatlantic reconciliation after a period marked by hostility to digital service taxes from the White House. Under President Donald Trump, the U.S. removed itself from OECD talks and imposed over $1 billion of trade tariffs on France, an early mover on digital taxation. The U.K. tax is one of several under investigation by the U.S.
Against this backdrop, companies hit by the U.K. tax are adjusting to a new regime with an uncertain future, the experts said.
Negotiations between the U.K. and the new U.S. administration regarding the tax will be complex, the experts said.
Whereas "knee-jerk" retaliation against trade partners could become a thing of the past, the U.S. government is likely to push for a 2% tax at the global level, in keeping with the U.K. levy, according to Richard Asquith, VP of global indirect tax at Avalara, a tax automation software provider. The U.S. could also push for the revenue threshold to be lowered so that the tax would apply to smaller, typically non-U.S. companies, Asquith added.
"The U.S. sees current rules as discriminatory and in violation of bilateral tax treaties," Asquith said. "It will want those thresholds brought down so Europe feels some of the pain as well."
But even if the OECD manages to break the impasse by its mid-2021 deadline, the practicalities of implementing the agreement into domestic law in various jurisdictions could mean the process is not complete until 2024, according to Casey Dalton, a tax expert at U.K.-based law firm Herbert Smith Freehills.
In the meantime, impacted businesses are expected to begin making payments according to the current U.K. regime to HM Revenue and Customs, or HMRC, by the third or fourth quarter of 2021 if their liable accounting periods end Dec. 30, Dalton explained.
In practice, this means that many firms will have far longer to make their initial payment than the first theoretical collection date of Jan. 1, 2021, according to HMRC.
U.S. entities targeted by the agreements are largely in favor of a multilateral levy. Both Amazon.com Inc. and Alphabet Inc.-owned Google LLC have voiced their support for an international framework for how multinational digital companies are taxed.
As a result of the U.K. tax, the e-commerce company said it began increasing fees for its sellers by 2%.
Despite pressure from the U.S. to abandon the tax and the potential threat of retaliatory tariffs, the U.K. is unlikely to change its stance, experts said.
Therefore, impacted businesses should focus on the present implications of registering and processing their payments, Adam Craggs, a partner and tax disputes expert at RPC, a corporate and insurance law firm, said. "The global solution is still only an ambition," he added.
The devastating economic effects of the coronavirus pandemic are bolstering local efforts to implement DSTs across the globe, leaving the U.S. fighting an uphill battle, Asquith said.
Impatient governments view the payments as a means of funding their COVID-19 stimulus plans. The U.K., which is also facing fiscal headwinds as a result of Brexit, has estimated that the DST will raise £70 million in 2019-2020, rising to £515 million in 2024-2025.
"Countries are always in search of extra tax revenue. But with COVID-19 they are looking for new targets," Asquith said. "Everyone will double down on DSTs so there really is no hope of this issue going away."