Summary

• The UK government denied any plans on dropping tax collection from companies like Facebook and Google.
• Facebook’s French subsidiary announced that is paying €100 million as government taxes.
• Though it has been concerning several governments for long now, the coronavirus crisis has increased the focus of the tax collection from digital giants like Google, Apple, Facebook, and Amazon.

The coronavirus-led economic crisis has compelled the world economy to increase complexities of various kinds. The crisis calls for more cooperation between the economies to speed up the recovery process, but the pandemic has left countries with no choice but to announce big rescue packages for survival and recovery measures. It need not be denied that these are the times of increased gap in tax collection from several potential sources. Amid the recent instances of toughened common grounds between countries to impose taxes on foreign companies, it is likely that the world would need to fight trade war amid the ongoing fight against coronavirus pandemic. Two such recent reports involving technology companies explain the comprehensive scenario in which these companies lower their tax payments to foreign governments and plans of several governments to impose taxes on foreign technology giants. We would discuss the recent announcements and also present the wider scenario around it.

UK government denies earlier reports of dropping tax on Facebook and Google

On 24 August 2020, the UK government denied any plans on dropping tax collection from companies like Facebook and Google. Disagreeing with an earlier report, which stated that the government is planning to drop taxing digital giants, including Facebook and Google, the finance ministry mentioned that it has been clear that it was a temporary tax that would need to be removed once a suitable global solution comes into effect. The UK government would keep working with the global partners to achieve that goal, added the ministry.

It is to be noted that a media report published last weekend said that the UK’s finance minister, Rishi Sunak, planned to drop the digital services tax that was introduced in April 2020. The report cited reasons that the government does not raise enough money, which is in the range of £ 500 million on an annual basis. This small amount could potentially hamper the push for a trade deal with the United States (US). Many of these technology companies being taxed are from the US.

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Facebook agrees to pay €106 million as back taxes to the French government

Facebook’s French subsidiary announced on 24 August 2020 that it would pay more than €100 million as part of the back taxes to the government. There would be a penalty payment apart from the tax money. The auditing of its accounts over 2009-2018 period by French tax authorities showed that Facebook’s subsidiary in the country owe a total of €106 million to the French government. Though the social media leader agreed to pay the amount, the details of the agreement made between Facebook and France's tax administration was not made available.

Facebook’s sales income from France almost doubled its total net revenue in 2019 from 2018’s €747 million. In 2019, Facebook had paid €8.5 million of income tax in France, a rise of approximately 50 per cent from 2018. Facebook reiterated that it seriously attends to its tax obligations and pays it all the markets where it operates. The digital giant works in close coordination with the tax authorities of respective countries to ensure that it follows all applicable tax laws and resolve any litigation.

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It is pertinent to know that France is working hard to bring necessary changes to international tax rules for digital companies such as Facebook, Google, Apple, and Amazon. France is of the opinion that these technology companies pay too little tax in the country, despite generating significant sales numbers.

Debate on tax laws and trade war gathered momentum during coronavirus pandemic

It is not new that digital companies like Google, Apple, Facebook, and Amazon (GAFA) have been working around to lower tax payments to foreign countries. These reduced tax revenue has been potentially lowering the tax collection in many countries. In many cases, such foreign companies generally do not require physical infrastructure, factories, or warehouses to operate, making it tough to screen their economic activities. It also makes it easier for them to shift their base.

Though it has been concerning several governments for long now, the coronavirus crisis has only increased the focus of the tax collection from digital giants. Even during the pandemic, many of these tech majors have added to their market shares, substantially eating from local companies and increasing the global tax transformation. Majority of the local retailers suffered on the hands of Amazon not only for profits but also the tax liability to their own governments, Majority of advertisement revenue of the local newspapers during the pandemic went to Facebook and Google. Amid this situation, the governments were needed to fund local recovery and protect jobs, while not being able to receive sufficient taxes from foreign digital companies. It was obvious that the governments looked at the foreign companies to support their deficits, if not completely at least a part of it.

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The European Union (EU) along with 137 countries in the Organisation for Economic Cooperation and Development (OECD) has been working towards finding a solution for more than a decade now. The solution is about imposing a revenue-based tax on digital giants. In June 2020, the US is known to have withdrawn itself from the talks to bring such changes into effect.

After the US withdrew itself from the discussions, many countries have presented their own solutions. For instance, many countries have like Austria, Italy, UK, and India have already imposed a tax on digital advertising revenue, while others like Spain and Canada might soon finalise one, as per media reports.

Since most of these digital giants are US-based companies, the US government responded with its own trade restrictions and tariffs and announced several trade investigations possibly leading to onset of a trade war. The countries that would be impacted are Brazil, Czech Republic, Austria, Spain, Italy, Turkey, India, Indonesia, and the European Union. It is expected that these countries could impose tariffs and measures to impact US exports. It is to be recalled that before the outbreak of the coronavirus pandemic, the US government threatened on imposing a 100 per cent tax on French goods hitting back at France’s revenue-based taxation system. To avoid a trade war, France had said that it would hold imposing these taxes until end-2020, while waiting for the OECD to come up with an effective solution.

Conclusion

Economies take every possible effort to avoid trade wars at any time. Many experts agree that given the economic downturn and slow recovery amid the ongoing fight against the crisis, a trade war would further destablise the uncertain recovery processes. The world is already seeing the challenges brought by the US-China cold war and disruption in global supply chains. The economic recovery process needs innovative and affordable technologies to support demand creation from consumers and revenue growth of the companies, avoiding taxation disputes. Several experts suggest that these times of crisis call for strengthening collaboration and increasing transparency between countries. While it remains to be seen when the US would again participate in the negotiations and play a significant role to smoothen the affairs, foreign countries must also revise the implementation of newly announced taxes for some more time. To support this win-win situation for all, the digital corporations must come ahead to contribute to the global economic well being, thereby adding to their shareholder’s wealth.