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G7 Summit – a missed opportunity for the UK to lead the global tax agenda?

By Laurence Field, Partner, Corporate Tax at national audit, tax, advisory and risk firm, Crowe.


On 24-26 August 2019, leaders of the seven G7 member states were joined by representatives of the European Union (EU) at the 45th G7 summit. High on the agenda was the ongoing debate surrounding the introduction of a Digital Services Tax.

Background

Tax hungry governments have come under pressure from their populations to raise revenue, especially from those perceived not to be paying their fair share. High on that target list have been the ‘digital giants’ - essentially US based digital companies that have proven hugely profitable, but harder to tax. As is often the case, many governments want a slice of those profits.

The taxation of internet companies is an area where the G7 were at loggerheads. While the public opinion seems to be in favour of increasing the taxation of these companies, there is little agreement on where, when and how the tax should be raised.

Many countries have proposed a Digital Services Tax – the UK has one on its books that may be implemented if a government can divert its energies away from Brexit. The French proposals for a 3% digital services tax had given rise to an entertaining spat between Presidents Macron and Trump – the former proposing a tax that would have affected only US companies, and the latter indicating he would retaliate with taxes on a range of French goods (as well as providing commentary on the relative merits of French and American wines).

In the end, peace was declared, with Macron indicating that he would still go ahead with the tax, but would refund the difference between any tax raised by the French measures and any multilateral approach eventually implemented by the Organisation for Economic Co-operation and Development (OECD). The tax was signed into statute in July and has retrospective effect to 1 January 2019, though President Trump avoided answers on whether he would still introduce tariffs on French goods.

How did we get here?

The global economy now operates via the click of a button and our futures fly around the internet at the speed of light. In contrast, the UK, for example, is stuck with a Victorian era tax system. International organisations have been slow to implement changes that reflect the modern economy and the system is now creaking. National self-interest, a fear of retaliation and the use of tax as a weapon in the international trade wars have all resulted in the international community being keen to talk tough. However, they remain reluctant to coordinate and engage in a debate about the most appropriate way to tax the modern economy.

It’s a shame that the G7 talks were focused on finding a compromise to the specific disagreement, rather than taking bolder action to drive real tax reform. While there are a number of national proposals to create a digital tax, the OECD is committed to fast-tracking an approach to the problem. Real impetus from the G7 leaders seems to be lacking.

It was an opportunity for the UK government to show it can engage with tax policy on a global scale. At the same time, these discussions, against the Brexit backdrop, could have been used as the impetus for the UK to show how it plans to reboot its own archaic tax system.

As the current UK Chancellor, Sajid Javid, recently acknowledged – the UK tax system is far too complex and in need of reform. Britain could have used the G7 stage to show the world that it is prioritising a system that is simpler and fairer, benefitting both taxpayers and the state. The UK is not alone in facing these challenges.

Where should we go?

The international tax system has been developed to try and avoid taxing the same profits twice. This involves countries agreeing how to apportion revenues for taxation between them. New business models have caused a real challenge for these principles. The change in political tone over the last few years has made it harder for countries to agree on how to proceed, but the urgency to reach agreement has accelerated. Leadership needs to be shown to reconcile the differing positions. Multi-lateral meetings between world leaders do not happen that often and it is disappointing that, despite tax being on the agenda, efforts seemed to have focused on settling a dispute rather than using political capital to modernise the tax system.

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