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DSTs thrust into political limelight

22 August 2019

Alexander Hartley

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As France’s digital services tax takes retroactive effect and the UK releases more details, tax heads spoke of a nightmarish cocktail of uncertainty and high politics.

Tax directors admitted to ITR that they are increasingly alarmed both at the prospect of more unilateral digital services taxes and at their emergence at the forefront of international politics.

The Ireland-based head of tax for a major US digital company told ITR that they expected many more unilateral DSTs to be introduced over the next year. The OECD will struggle to resolve the issue before its own 2020 deadline, the tax head said, causing more countries to follow France’s lead and grab revenue where they can.

Yet, in a sign of their unwillingness to get ready for DSTs before they have to, tax directors also told ITR that they are so far resisting doing compliance work for other countries that are considering introducing a DST.

The head of tax at a Malaysia-based media company told ITR that, even as they saw different countries continue to introduce new taxes, they were undertaking no work whatsoever to be ready to comply, or even calculate how much of their revenue would be in scope.

There was simply too much uncertainty for them to be able to justify investing any financial or human resources into getting ready for DSTs, they said.

Tax is dragged into trade arena

Others spoke to ITR of their fears that DSTs will drag tax policy into the domain of international trade acrimony.

One senior advisor at a UK law firm, who has previously worked at HMRC, told ITR that they expect the UK’s DST to be "the first thing on the table" in any post-Brexit trade negotiation with the USA.

After France signed its DST into law on July 8, US President Donald Trump tweeted: "France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home country, the USA."

"We will announce a substantial reciprocal action on Macron’s foolishness shortly." The president, a known teetotaler, added: "I’ve always said American wine is better than French wine!"

Trump directed the US trade representative to open an investigation into whether or not France’s DST discriminated against US companies and if they merited a US trade retaliation.

"The services covered [by France’s DST] are ones where US firms are global leaders," the office of the United States Trade Representative said in a statement announcing the opening of the investigation.

"The structure of the proposed new tax as well as statements by officials suggest that France is unfairly targeting the tax at certain US-based technology companies."

Doubts over tax authorities’ ability to administer DSTs

As the debate over digital tax continues to roil, a source at the Spanish tax authorities told ITR that Spain would not actually be able to enforce its proposed DST effectively.

The tax is "really, really difficult [to administer]," said the source, who requested anonymity to discuss the sensitive issue. "I mean, you need these companies to pay these kinds of taxes on a voluntary basis. If they don’t want to pay, they will not."

The source suggested that the proposed EU-wide DST might have been enforceable because of collaboration between European countries, but that it would be easy for companies to minimise their obligations to pay a Spanish DST and hard for Spain’s tax authorities to challenge them.

"Unilateral measures are hard," they said. "These kinds of companies are so huge, they will press, they will plan their operations in a way that, for the tax administration, it will be impossible to check the correctness of the amounts of this kind of tax."

Spain’s planned DST was delayed when its government collapsed, but observers both inside and outside the tax authorities consider it likely that a new government will take up the project again.

A spokesperson for the Spanish tax authority said to ITR: "The position of the government of Spain is to approve this tax. We are sure of its usefulness. In addition, when an agreement on the digital tax is reached internationally, we will adapt the legislation to that agreement."

However,it will not reassure those companies hoping to minimise the disruption and uncertainty from DSTs to know that even figures within the tax authority of a country threatening to implement one doubt their own ability to administer them.

International Correspondents