Tuesday 8 June 2021 3:01 pm

Tech giants set to slash UK tax bill after G7 agreement

American tech giants are set to have their UK tax bills slashed under a new global agreement signed by the G7, a think tank has warned.

The global minimum corporation tax, agreed by finance ministers in London over the weekend, is aimed at cracking down on tax avoidance by companies such as Amazon, Facebook and Google.

But while the new framework will likely lead to an increased overall tax bill for these tech giants, it is the US that stands to gain rather than the UK.

In fact, the agreement could result in “very substantial tax cuts” in Britain for American tech companies, according to analysis by Tax Watch.

This is because, as part of the deal, the government has agreed to drop its own digital services tax, which was introduced last year.

The DST charges a two per cent levy on revenue generated from UK users of major tech firms, and was expected to raise £500m each year.

A Treasury source insisted that the UK’s digital service tax was always a temporary measure, adding that any calculation of tax rates needed to take into account potential US responses to the DST, such as tariffs.

The US had previously hit out at the UK’s tech tax policy, saying it unfairly discriminated against American companies — something the government denied.

Cutting down the bill

The most prominent part of the G7 deal is a 15 per cent global minimum corporate tax rate, which is designed to prevent companies from booking their profits in low-tax jurisdictions.

While this will enable the UK to collect more tax from its own large corporations, it will have no impact on US-based companies.

The second part of the agreement, known as pillar one, is aimed at making firms pay tax in the countries where they have users.

The Tax Watch analysis concluded that the tax rate for Amazon, Facebook, Google and Ebay from pillar one would be below or at the same level as their current UK tax liabilities. But with the digital services tax removed, the overall effect would be a tax cut.

Based on the companies’ 2019 figures, Google stands the most to gain from the changes, benefitting from a tax cut of £158.7m. Facebook would pay £22.2m less, while Ebay’s bill would be trimmed by £11.9m.

Amazon would not qualify for the pillar one tax regime, as its profit margin is below the required 10 per cent. However, if the rules were amended to apply to specific business divisions, the taxman could target Amazon Web Services (AWS), which accounts for more than half the company’s profit and has a margin of 25 per cent.

The G7 is understood to be planning to ensure that Amazon is subject to the new rules by applying them to AWS.

A source close to the discussions told City A.M. that “further consideration is being given to companies that have different business lines”.

It is thought these details will be fleshed out when the agreement is discussed at a wider G20 meeting.

“Our analysis shows that for every company that is subject to the DST, the Pillar One proposals would lead to substantially less money being raised in taxation in the UK,” Tax Watch said.

“If the UK therefore goes forward with the removal of the DST, as the G7 communique strongly suggests it will, the package of reforms will lead to a net loss of tax in the UK from eBay, Amazon, Google and Facebook. While not the only companies likely to see a UK tax reduction as a result of the removal of the DST, these four are almost certainly the largest.”

A Treasury spokesperson said: “The historic global tax agreement backed by G7 finance ministers reforms the global tax system to make it fit for the global digital age, achieving a level playing field for all types of companies. The deal makes sure that the system is fair, so that the right companies pay the right tax in the right places.

“The final design details and parameters of the rules still need to be worked through, and the OBR will analyse and publish the fiscal impacts in the normal way.”