Canada recently announced that it will abolish its Digital Services Tax (DST). India and New Zealand have both done the same thing this year. Momentum has clearly swung against these kinds of taxes in response to a renewed push from the US, which has long taken the view that these taxes are discriminatory.
This is good news from the perspective of promoting better tax policy. Taxes on business turnover based on arbitrary thresholds and distinctions between services are inherently distortionary. Governments should adopt more consistent and coherent taxes.
It is also good news as it removes what would otherwise be a perennial source of frustration for the trading relationship between those countries and the US. This pressure has become more acute following Executive Orders from the Trump Administration that made securing the abolition of Digital Service Taxes a priority.
The UK increasingly stands out, operating one of the most onerous remaining Digital Services Taxes–taking in an estimated £808 million last year, and surpassing France’s €800 million, according to the latest estimates for DST revenue in key markets. And, as HM Treasury reported, around 90% was paid by five companies, believed to be all American according to the U.S. government. This will make it harder to achieve progress on a broad range of priorities for negotiations with the US.
It would be a mistake for policymakers here to assume that hostility to the tax is confined to the White House. Congress recently proposed legislation that would retaliate with taxes on dividends being paid to companies imposing Digital Services Taxes or other taxes that the US sees as extra-territorial. There is broad and bipartisan opposition to digital services taxes that will not abate until they are removed. U.S. antipathy to discriminatory taxes extends back decades: as part of the the Uruguay Round negotiations creating the WTO, culminating in the 1994 General Agreement on Trade in Services (GATS), the United States secured agreement from all WTO members that it could legally impose countermeasures on any country implementing “discriminatory or extraterritorial taxes, more burdensome taxation, or other discriminatory conduct” (U.S. MFN exemptions).
On the other hand, agreement at the G7, which has averted the proposed retaliatory legislative threat (Section 899) for now, signals that there is still life in the multilateral process at the OECD to further its key goal of curbing tax arbitrage while respecting fundamentally different national tax systems.The G7 countries pledged “a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all countries.” The difficult work of reforming international tax principles to adapt to new business models (including but not limited to digital services) may or may not gain momentum–but without the elimination of unilateral DSTs as a precondition, any chance of success is likely doomed.
There are exciting opportunities for the US and the UK to do more together in the digital economy specifically, as the first and second largest exporters of digitally-delivered services. CCIA set out the rationale and options for such an agreement last year. The Government has now published its Trade Strategy, which includes support for more Digital Trade Agreements, building on the UK-Singapore Digital Economy Agreement and the UK-Ukraine Digital Trade Agreement. There is a huge amount that the UK can achieve in digital trade. However there is a credibility problem in trying to promote digital trade liberalisation on one hand, while imposing a discriminatory tax on digital services on the other.
These are also exciting times for the UK digital economy. AI innovation is generating new services for consumers and business users alike. Global technology companies are investing in the UK, with Amazon recently announcing plans for £40bn of investment over just three years. Removing the Digital Services Tax would send a positive signal that the Government wants to seize the opportunities that a growing global digital economy represents for the UK.
What can the UK and other countries in a similar boat do? Last year, the Tax Foundation wrote about digital taxation and set out a range of recommendations. Particularly on Digital Services Taxes, it argued that countries should pursue clear timelines for removal of digital services taxes to avoid a harmful tax and trade war.
Taking that step domestically, while supporting multilateral efforts through the OECD to keep corporation tax policy under appropriate review, would stay true to the Government’s manifesto commitment that it would back “international efforts” on digital tax. It would avoid a world where the UK stands out for a tax that was never a good idea, but looks increasingly arbitrary and out of place as the digital economy matures and other countries abandon similar efforts.
