The UK government says the UK’s Digital Services Tax (DST) raised £360m ($430m) in its first year, with 90% coming from five tech giants, including known to be Apple is found.
The 2% tax on UK gross receipts was designed to partly offset tax evasion measures used by Apple and others to funnel UK profits to low-tax jurisdictions like Ireland. Other companies that pay DST include Amazon, Google and Facebook…
There have long been complaints that American tech giants pay too little tax in European countries. A common tactic, used by Apple and Google, among others, was to establish a European headquarters in Ireland, where business taxes are much lower, and to state that profits from all sales in Europe were earned at that headquarters, not in countries singles like the UK.
This meant they would largely avoid corporation tax, which is levied on profits rather than income.
This, of course, led to the highly publicized court battle between the European Union and the Irish government, in which Ireland was accused of offering companies like Apple advantageous tax schemes to lure them into the country. Under EU law, it is illegal for member countries to offer business-friendly tax regimes.
If Ireland had lost the case, it would have had to collect $15.8 billion in underpaid taxes from Apple. However, Ireland won, stating that Apple did not have to pay.
It’s not the end, but we’ll get to that in a bit…
UK Digital Services Tax (DST)
Several European countries have moved to address the problem, at least partially, by taxing tech giants based on revenue generated in the country, rather than on reported profits. This would indicate that wherever companies chose to channel their profits, they would pay at least part of the tax in the country where they were earned.
France was the first to declare a “technology tax” of 3% of turnover, the United Kingdom among others to follow suit. UK Daylight Saving Time came into effect in 2020.
We say “partly” because daylight saving time, as the name suggests, only applies to sales of digital products, not physical sales. In Apple’s case, that means the company pays 2% on things like UK app store revenue, as well as services like iCloud, Apple Music and Apple TV+.
In the case of revenue from the App Store, Apple pays half the tax and deducts the other half from the money returned to developers.
DST was estimated to gross £275 million ($328 million) in its first year, but The Guardian reports that strong sales of apps and other forms of entertainment services during the pandemic raked in £360 million ($430 million).
The tax expires in 2024
The DST is a temporary tax measure that only applies for the period 2020-2023. Starting in 2024, a global tax agreement is expected to come into force ensuring that all companies pay a fair share of tax in each of the countries in which they operate.
It has long been recognized that the imposition of taxes on foreign companies by individual countries is untenable. Different tax rates would always make tech giants look for countries with the lowest taxes, and countries that impose taxes like DST risk retaliation in the form of tariffs on their own exports.
The only real solution is a consistent global agreement on the tax treatment of companies in each of the markets in which they operate, stating that all companies and all countries would operate on a level playing field. In 2019, the Organization for Economic Cooperation and Development (OECD) announced plans for such an agreement.
Work on this agreement began in 2020, with the participation of 137 countries, and the new tax regime is expected to be implemented in 2024.
Apple CEO Tim Cook backed the OECD plan. While this is likely to increase the taxes paid by the Cupertino company, it will at least simplify things and eliminate a growing public relations headache.
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