Arguments that ‘big tech’ is avoiding national taxes are not new. The rapid expansion and digitisation of the global economy has brought with it the ability for companies to shift profits and avoid tax liability in the jurisdiction of their economic activities. It is estimated that this has resulted in as much as US$240 billion in missed tax revenue worldwide. In 2015, the OECD adopted 15 measures designed to tackle base erosion and profit shifting which were adopted around the world to varying degrees: e.g. Australia moving to impose GST on imported goods and services. The chief measure, however, of a digital services tax has until recently appeared out of reach.

What is a digital services tax?

A digital services tax is a tax on selected gross revenue streams generated by multinational companies from users in a particular jurisdiction. The tax applies to gross sales revenue, and not profits, which makes it more difficult for digital businesses to avoid. One risk of such a measure however is that it makes a country’s businesses less competitive - which is why the OECD has been working towards a uniform digital services tax which, if broadly adopted, would maintain a level playing field.

The OECD and countries going it alone

The OECD efforts to agree a uniform digital services tax have stalled largely due to opposition from the USA, which is concerned, perhaps accurately, that any digital services tax will primarily affect US-based companies such as Amazon, Apple, Facebook and Google. As such, US officials have proposed alternative “safe harbour” provisions which would mean technology companies were only subject to the digital services tax on a voluntary basis. Such proposals were unsurprisingly rejected by other OECD countries.

In the face of this stalemate, several European countries have chosen to implement their own digital services taxes. This includes Austria, France, Hungary, Italy, Poland, Spain, Turkey, and the United Kingdom. The table below illustrates the key features of the taxes that have been implemented in France, the UK and Spain.

This table is simplified and there are a lot of subtleties not included. For example, tax free thresholds apply and some or all of the digital services taxes can be offset against local corporate taxes.

The estimated tax revenues are based on those governments’ own modelling so it remains to be seen what impact each implementation will have. The Spanish digital services tax is believed to have a broader base and capture more entities which accounts for the larger estimated annual impact.

Despite the French digital service tax coming into effect at the start of 2019, authorities have not commenced collection because of threats from the USA to impose retaliatory tariffs on imports to the USA. With the changed administration in Washington DC, French authorities have indicated collection will commence. Proving that partisanship over foreign taxes ends at the water’s edge, the new Biden administration has indicated that it considers the unilateral digital service tax regimes to be discriminatory.

The European jurisdictions which have adopted a digital services tax have committed to rescind them once an OECD-wide agreement is reached.

Out of safe harbours and onto OECD agreement

As mentioned, the USA had proved to be the major stumbling block for the OECD in reaching agreement on a multilateral digital services tax with their proposed “safe harbour” provisions which would give the proposed tax payers the option of not paying. Even though the new Biden administration has voiced concerns with the countries which have implemented their own digital services taxes, in recent days, the newly installed Treasury Secretary Janet Yellen has indicated that the USA will no longer be insisting on the safe harbour limitations. Various stakeholders have flagged this as a promising sign with parties now targeting July 2021 for agreement.

Read more: US removes stumbling block to global deal on digital tax