US has imposed a formal investigation on UK for levying digital taxes on its firms, quoting that they are unfair. It plans to enquire seven more countries in Europe along with India. US also adds that such issues need to be fixed via multilateral agreements through the Organisation for Economic Co-operation and Development (OECD).
The UK Treasury defends the tax saying it has not violated any global trade obligations by putting the levy. The ongoing UK-US bilateral trade negotiations may hit a roadblock with this non-friendly move by the US Government.
A Treasury spokesperson recently clarified that UK’s Digital Services Tax ensures that companies pay a tax in line with the value they derive from UK customers.
With the advent of the digital world, the products and services being traded over the internet have also increased exponentially, more so with the spread of coronavirus across the world. When physical products are traded, it is easier to keep a track of their movement and impose a tax on them. But when services are traded across national borders over the internet, it is difficult to quantify them and impose taxes. Till now Digital Services is not a well-defined tradable commodity in the international tax regimen terminology under the World Trade Organization (WTO), OECD or any bilateral trade arrangements.
It is but obvious that during the corona times, when the proportion of such services has arisen globally, the country providing such services can become an easy scape goat. It is in this regard that many countries are now contemplating taxing such digital services on the same lines like customs duty on imported goods. This move, however, is not going down well with the United States of America. US is the largest exporter of digital services in the world and will be adversely impacted if a related international tax regimen comes around.
UK has decided to go ahead with its taxation system to tax digital services being imported into the country. The country had earlier this year parted ways with European Union with which it was in an economic partnership for forty-seven years. This had left Britain with a big trade vacuum to be filled in. In that quest, the it had initiated trade negotiations with the US in order to compensate for the losses, soon after the Brexit crisis. The negotiations are still in process and may hit a roadblock if the United Kingdom sticks to its plan to impose digital taxes on US firms. US is likely to impose tariffs in some other forms to discourage countries from harming it’s tech sector.
UK had imposed a 2 percent tax on digital sales from April this year. This move is expected to garner up to £500 million a year, for the country’s total tax kitty.
The United States has been United Kingdom's longstanding and all-whether ally. The two nations have a long history of cooperation in almost all spheres of international trade. In this hour of crisis when the world is standing on the verge of a deep recession, the United Kingdom would have to make some very hard choices between forgoing a potentially good tax revenue source and angering an alley.
Hit by economic recession and drying up tax resources during the ongoing uncertain period, other regions, especially Europe and Asian, are also contemplating a similar move. Last year, US had investigated France for its proposed taxes on digital services from US firms. It had threatened imposing tariff on buying wine from France.
The United Kingdom currently is a large exporter to the United States, especially of cars, which bring in foreign exchange earnings. In the year 2019, around 20 percent of total auto exports from the UK landed up in US. Any punitive taxation by the United States on these exports will not just curtail the number of cars being exported, but will also be catastrophic for the British car industry which has been suffering from a cyclic slowdown even before the coronavirus pandemic made its mark. According to the latest estimates available for April this year, only 197 cars were manufactured in UK, out of which 152 were exported. These estimated were calculated by Society of Motor Manufacturers and Traders, the British automobiles association.
The current coronavirus pandemic has had a major impact on the way countries are currently perceiving a taxation system for digital services. During this global crisis, the role of digital services has risen many-fold. While most other traditional businesses suffered major production as well as revenue losses, the impact on digital business was subdued. In fact, there are certain types of digital services which have witnessed phenomenal growth during the pandemic than they would otherwise witness in normal times.
Countries who have been witnessing this transition in world business space are now becoming increasingly wary about losing out on customs revenues with an increased proportion of such services in international trade. In the current scenario, when a significant part of the world is under lockdown, not many physical goods can be transported across borders. This fall in global trade has translated into a drastic fall in customs earnings. Under such circumstances, any international commercial transaction is bound to catch the attention of tax authorities.
It is pertinent to note that UK is at the forefront of using digital services across many of its sectors and remains a big market for tech giants like US. For instance, the country’s banking and finance sector is one such prominent user. In terms of numbers, UK has a higher adoption rate of digital financial technology at 71 percent, as compared to the global average of 64 percent. These figures are based on expert estimates for the year 2019.
Cloud services rendered by American tech giants like Google and Microsoft are well known, and such firms will be impacted by these taxes. Platforms like Facebook and Amazon will also take a hit. These companies are able to render their services world over with their staff sitting comfortably in their offices in the United States.
With the increasing sophistication in world trade, the share of digital services is bound to increase. While the US and other digital service exporting countries continue to oppose a digital service tax, but over a period of time, most countries would have imposed the same and garnered revenue.
It is imperative that at some point of time countries would have to come to a negotiating table, either under the ambit of WTO or some other bilateral forum to have a uniform set of rules that will regulate international trading of digital services. Technological innovations have made many new types of businesses possible, which are different and far more complex than traditional goods and services. It is but imperative that taxation systems around the world also evolve accordingly to keep pace.
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