What is Happening in the International Tax realm?
Proposed Digital Service Tax (DST) and the Impact on the United States
There could be a new tax that directly affects U.S. technology companies. The European Union has proposed to implement a tax on digital business activities conducted within the EU member states. Major countries like U.K., France, and Germany have shown support. But, recently Germany has shown less enthusiasm towards the new tax (where) countries like Sweden, Ireland, and Netherland oppose it. While EU countries debate on the tax, U.K. soon to leave the EU has decided to take matters on its own hand. November 2018, U.K. Treasury proposed DST that would go into effect in April 2020. Because U.K.’s proposed DST is closer to be brought in front of the parliament, we will look into implications of DST in the U.S.
The government of UK believes that the current international tax framework has failed to keep up with changes in the digital age, thus need an international tax system fit for the digital age.
UK will tax DST at 2%, of gross revenues of companies that generate their income from social media platforms, online-marketplace, and search engines. Such a company could be subjected to DST if it generates £500 million in global revenue and £25 million from business activities that are in connection to U.K. users.
Because DST is a tax on gross revenue it will not be qualified for tax credits under income tax treaties.
The DST will be reviewed again in 2025. Thus, U.K. hopes DST to be a temporary tax and replace by a compressive global solution.
DST will greatly impact U.S. tech giants like Google, Facebook, and Amazon. The U.S. has already shown resentment for DST. House Ways and Means Committee Chair Kevin Brady (R-TX) issued a statement indicating possible retaliatory tax legislation in the U.S. The U.S. Senate Committee on Finance wrote a letter urging EU to abandon DST. In their letter, the Committee addressed that EU’s DST would discriminate against US companies and undermine the current international tax treaty system resulting in a new transatlantic trade barrier. The letter also addressed the issue of GST breaking traditional tax principle that taxed corporate profits not revenue, which would lead discriminatory double taxation of multinational companies.
We are keeping close attention to development in DST both in Europe and reactions in the U.S.
This material has been prepared for information purposes only, and it not intended to provide, and should not be relied on for legal, tax, or accounting advice. Please consult your advisors for specific advice.