Commentary

New Chancellor Faces A Taxing Question On Tech Giants

Mark Zuckerberg is a realist. You don't get to be a billionaire several times over without knowing which way the wind is blowing.
Right now, he realises the public outrage at legally avoiding taxes in highly lucrative markets, and paying them in areas with lower or zero tax rates, is just not acceptable.

Hence, today we have the announcement that he accepts that Facebook companies will have to pay more tax.

He probably feels it will be seen as a magnanimous gesture that will boost his brand image. Far from it, I think most people would have the reaction that it's only right the tech giants should pay something resembling their fair share of tax. And while we're at it, what about all those years you (legally) played the system? How about a rebate?

Anyway, it's interesting timing. Zuckerberg's comments come at exactly the same time that the UK faces a massive question. Does it carry on, as it has promised, with the 2% Digital Services Tax -- or does it use the wiggle room it previously gave itself to wait on OECD rules that are due to be published some time later this year?

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It was the latter Zuckerberg was talking about. He was accepting the OECD is moving away from only enforcing tax being paid in a country when business is physically carried out there to a system that better reflects the digital economy where business might happen via a server in a far-off country.

Zuckerberg is actually acknowledging that something that is going to happen whether he likes it or not and it will undoubtedly lead to new tax rules that will see Facebook pay more. It's a little like looking at the weather radar and accepting a storm is coming.

What he is not saying is that he welcomes a direct tax on digital services, akin to what the Chancellor is due to bring in this April. That kind of direct, extra tax on transactions cannot be avoided legally. It's an obstacle that cannot be sidestepped by clever accounting. That is why he's accepting OECD rules and not reference direct taxes.

Why? Because one can imagine there will still be plenty of room for companies to loan themselves massive sums that get paid back via low-taxation havens, moving gargantuan sums of money from lucrative markets to offshore havens or at least, low-tax developed markets. They will still be able to charge themselves a fortune to use their own name and branding via another gargantuan sum that gets paid to the aforementioned range of low taxation havens.

Profit? What profit? It all went in paying for the rights to call ourselves by our own name.

So, Zuckerberg is accepting the lesser of two evils here. OECD rules have been years in the making, and they will land at some point.

Digital Services Taxes are a new idea and are much less avoidable than taxes on profits. It's little wonder that Zuckerberg is opting for more of the same -- only a little more fairer, rather than a completely new form of direct taxation.

It shows the mood music coming out of America is for the OECD side in the argument when it tells the UK to hold off on April's new direct tax. American threats led to France dropping its equivalent of the Digital Services Tax, and the UK has already given itself the excuse of OECD rules being introduced to follow suit.

At this point, look stage right and we have a new Chancellor entering the fray.

As Sajid Javid decided to walk, rather than accept being under Boris' thumb, we have a new Chancellor, Rishi Sunak. He is a fresh face who has made no promises to tax the tech giants.

Anyone else see an almost certain climb down in the making. A guy who has never been on tv interviews saying he is coming after the tech giants is now the Chancellor. He can easily say the tax is "postponed" until the new OECD rules come in.

It's the tone being set by President Trump and it's the direction of travel Zuckerberg has said he'll accept, in what appears a little like a plea bargain deal -- we'll accept OECD but don't get us started on new direct digital taxes.

We have three weeks to see how this one plays out. Regular "MAD London" readers will know I've suspected for a long time the Digital Services Tax would be kicked into the proverbial long grass.

Today, we have a new Chancellor, Boris desperately needing to keep America sweet for a new trade deal and at least one tech giants saying he'll agree with OECD rules and pay more tax on profits in the country where they originate.

It seems there's only one direction of travel here, doesn't it?

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