OECD Will Force Tech Giants To Be Fair On Tax, So EU Doesn't Have To

It's about time. That sums up how most people in the UK are probably feeling right now about the OECD finally getting its act together to seek agreement from the G20 on a new way of taxing the tech giants.

And if that doesn't work, the incoming European Commission (the executive side of the EU government) has committed to doing the job for the OECD themselves.

To the untrained eye, it might look like more of the same. This debate has been wrangling on and on for years. I've talked with senior accountants who claim tax is not as easy as it seems because it is difficult to attribute the value a product or service generates. Does it come from a piece of IP held in one country, a brand registered in another, the sales team in one region or the development guys in another?

One need only look at today's announcement that Facebook paid just GBP28m corporation tax on UK revenues of GBP1.6bn, prompting The Guardian to point out that with a profit of GBP97m, its profit margin in the UK seems very low compared to other regions.

I think we all know what the paper is trying to say there, don't we?

Now, I'm not an accountant, but from what I can understand, it looks like the OECD is trying to inject some common sense to ensure revenue is turned into profit and taxed in the country where the business took place.

As Sky News points out, the new shift is -- to quote the body itself -- shifting tax liability to where the tech giants "have significant consumer-facing activities and generate their profits."

In other words, it's not an all-or-nothing situation, but the authorities are proposing that tax has to be paid -- if not in full, at least in a sizeable part -- where the transaction happened. For the person in the street, this makes perfect sense.

Lawyers and accountants will try to argue counter points and then try to bend rules to suit clients, but the premise is simple enough. If you sell advertising in the UK, quite a bit of that needs to be taxed in the UK. The devil will be in the details, but that's the guiding principle.

There are a couple of points to bear in mind here. First of all, it would appear to be no coincidence that the European Commission has vowed action and to support countries raising Digital Services Tax, as France has and the UK plans to.

Sky News even quotes the OECD as hoping its proposed measures will avoid EU countries taking unilateral action.

The second point is that the UK has always promised not to launch the Digital Services Tax in April 2020 if there was a clear sign the international community was coming together to tackle the thorny issue of the tech giants earning billions in the UK, but then accounting for much of the profit in territories with far lower tax rates. 

This has probably given the Chancellor -- at the moment Savid Javid -- a reason to back down that is likely to be welcomed if the UK is seeking closer ties with American businesses in the even that Brexit occurs. 

More to the point, it would exempt the UK from any retaliatory action from President Trump. He has already warned any country imposing a Digital Services Tax, or equivalent, would be seen as picking on American businesses and he would not stand for it. We already face higher tariffs on whisky and clothing, and after the recent WTO decision in favour of the US, the last thing the UK needs is retaliatory tariffs on other goods. 

So it would appear the OECD is moving forward to convince the European Commission that action is on the cards and that unilateral taxes are not required. This will save the UK from have a trade fight with the US, and hopefully in the end will lead to a fairer tax system.

It has been years in the making, but now the OECD has until the end of next year to get tax sorted out so it is more fair and represents where revenues have been generated -- not where they can be squirrelled away to.

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