Regulating tax in a digital age

An expert group is to present advice on taxing the digital economy

Revelations in 2012 that internet companies in the United States were paying unusually low rates of tax on their activities in the United Kingdom came at a bad time. The UK government was implementing swingeing cuts to public spending in order to balance its books, and the country was mired in recession.

Evidence to a UK parliamentary committee revealed that, over three years, Amazon’s UK division had paid £2.3 million (€2.8 million) in tax on sales of £7.1 billion (€8.7 billion), while Google in 2011 paid £6 million (€7.3 million) in tax on £2.5 billion (€3.1 billion) of UK revenues.

Similar figures were revealed for Atos, an IT services company, bookings.com, a leading travel website, Facebook, a social networking company, and Apple, a producer of computers and smartphones.

Such companies insist that they are acting within the law and are simply following their duty to maximise shareholder value.

Yet the low tax paid by some hi-tech companies is not just a question of fairness and tax revenues; it has also become a point of contention for European Union businesses.

European companies such as UK department store John Lewis or Spanish publishing house Grupo Planeta claim that more mobile and savvy multinationals can use international and EU rules to benefit from unfair tax advantages.

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In response, the European Commission set up a high-level expert group in October to examine the question of how to tax the digital economy. “Today’s tax systems were conceived in a pre-computer age,” said Algirdas Šemeta, the European commissioner for taxation. “So it is no surprise that they often clash with the modern, digital economy.” The expert group has been asked to produce “a range of possible solutions” to the issue by the summer.

Many of these are likely to overlap with the Organisation for Economic Co-operation and Development’s work on base erosion and profits shifting (see page 11), which is scheduled for completion by September 2015.

Nicholas Hirst