The British government says that the UK digital services tax (DST) has raised £360M ($430M) in its first year, and that 90% of it came from five tech giants, known to include Apple.
The tax of 2% of gross revenue earned in the UK was designed to partly counter tax-avoidance measures used by Apple and others to funnel UK profits into low-tax territories like Ireland. Other business paying the DST include Amazon, Google, and Facebook …
Background
There have long been complaints about US tech giants paying too little tax in European countries. A common tactic, used by Apple and Google among others, was to establish a European HQ in Ireland, where business taxes are much lower, and to declare that profits from all sales in Europe were made by that HQ, not in individual countries like the UK.
That meant that they would largely avoid corporation tax, which is charged on profits rather than revenue.
This of course led to the high-profile court battle between the European Union and the Irish government, in which Ireland was accused of offering companies like Apple sweetheart tax arrangements in order to attract them to the country. Under EU law, it’s illegal for member countries to offer favorable tax arrangements to companies.
If Ireland had lost the case, it would have had to charge Apple $15.8B in underpaid tax. However, Ireland won, meaning that Apple did not have to pay.
This is not the end of it, but we’ll get to that in a moment …
UK digital services tax (DST)
A number of European countries decided to tackle at least part of the problem by imposing taxes on tech giants that were based on revenue generated in the country, rather than declared profits. This would mean that wherever the companies chose to funnel their profits, they would pay at least some tax in the country in which it was earned.
France was first to declare a “tech tax” of 3% of revenue, with the UK among others to follow this example. The UK’s DST came into effect in 2020.
We say “partly” because the DST, as the name implies, applies only to sales of digital products, not physical ones. In Apple’s case, this means that the company pays 2% on things like App Store revenue in the UK, alongside services like iCloud, Apple Music, and Apple TV+.
In the case of App Store revenue, Apple pays half of the tax and deducts the other half from the money passed on to developers.
It was estimated that DST would raise £275M ($328M) in its first year, but The Guardian reports that strong sales of apps and other forms of entertainment services during the pandemic saw it actually raise £360M ($430M).
Tax expires in 2024
DST is a temporary tax measure that applies only to 2020-2023. From 2024, it is expected that a global tax agreement will take effect, which ensures that all companies pay a fair share of tax in each of the countries in which they operate.
It’s long been acknowledged that the imposition of taxes on foreign companies by individual countries is not sustainable. Differing tax rates would still see tech giants shopping around for countries with the lowest taxes, and countries that impose taxes like DST would be at risk of 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, meaning that all companies and countries would be operating on a level playing field. Back in 2019, the Organization for Economic Cooperation and Development (OECD) announced plans for such an agreement.
Work on this agreement began in 2020, with 137 countries participating, and the new tax regime is expected to be implemented in 2024.
Apple CEO Tim Cook has lent his support to the OECD plan. Although it will likely increase the taxes paid by the Cupertino company, it will at least simplify matters – and will remove a growing PR headache.
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