U.K. Digital Services Tax Introduces New Tech Weapon To Global Trade War

Trade War

The U.K has announced its plans for a new 2% tax on local revenue generated by large tech firms like Google, Facebook, and Amazon. By doing so, it has become the largest global economy to aim a federal tax directly at U.S. tech giants. Expect that move to open the door on a new global salvo of taxes on the digital economy that will create nearly as much complexity and compliance costs as they do tax revenue.

The U.K. is hardly alone in its efforts to capture tax revenue from digital services. The concept first came to bear in 2013 in the Organisation for Economic Cooperation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting. This worldwide tax reform manifesto, more commonly known as BEPS, is a series of suggestions made by a consortium of global government representatives. At its core, BEPS lays out a series of actions designed to realign contemporary tax policy with the realities of the increasingly global and digital economy.

But without any real enforcement power and reliant upon building consensus among 110 members, the OECD is not the fastest-moving group in the world. They are currently proposing to have a consensus on how to move forward with actual tax reform plans by 2020.

Individual governments, however, emboldened by BEPS, and increasingly interested in using tax as a tool to enforce their global trade agendas, have been moving much faster. So far, India, Italy, Spain, the E.U., and now the U.K., have all proposed some form of digital services tax aimed at extracting revenue from firms who transact business on their shores, whether or not they have a significant physical presence in that region.

In fact, the first real big move on the digital tax front actually came from the U.S. Though it was not positioned so overtly as a digital tax targeting specific tech companies, the U.S. tax reform plan introduced a complicated provision called Global Intangible Low Taxed Income (GILTI), which creates a new category of foreign income for U.S. shareholders that own 10% or more of a foreign corporation. GILTI income is defined as any foreign income that exceeds 10% of a foreign subsidiary’s Qualified Business Asset Investment (QBAI), which are essentially the fixed assets of each foreign subsidiary with U.S. tax depreciation rules applied.

Source: Forbes

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