In June 2021 the G7 announced that it had reached an agreement on proposals to change the way that the largest multinational companies are taxed. This included a mechanism to redistribute profits to countries where sales are made (such as the UK), often referred to as “market jurisdictions” . The final agreement is due to be signed off in October 2021 at the OECD.
A new analysis from TaxWatch has demonstrated that tech giants will almost certainly end up paying less tax under the proposals put forward by the G7 than they are currently liable for under the digital services tax.
Scrapping digital services taxes was a key demand of the United States in the negotiations for a new global tax deal, which is expected to be finalised next month at the OECD.
TaxWatch has undertaken an analysis of the formulae used to calculate the DST and the potential future tax liabilities under the G7 proposals, and concludes that with a digital services tax rate of 2%, the current UK DST rate, and a corporation tax rate of 19%, the current UK corporation tax rate, a company would have to have a profit margin of 62% in order to pay more in tax under the G7 proposals than under the DST. Historically tech companies have never achieved these profit margins.
If the UK tax rate rises to 25%, as it is currently scheduled to do, then the profit margin required before a company ends up paying more than under the DST falls to 48%, a margin rarely seen historically.
The paper also analyses the proposals that have recently been put forward by the G24 group of countries, which advocate for more profit to be reallocated to countries where revenues are made (such as the UK) under the OECD formula. If these proposals were adopted, then tech companies would be likely to end up paying more in tax in market jurisdictions, with the result that profit margin required before a company pays more dropping to 44% assuming a 19% corporate tax rate or 36% assuming a 25% corporate tax rate.