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British digital tax is designed for American giants. What is "digital tax"?

(original title: Yang Sanyi: Britain's introduction of digital tax today subverts the traditional tax rules)

The UK government has confirmed that a digital tax will be levied today (April 1, 2020). The tax will be applicable to enterprises with global sales of more than 500 million pounds and at least 25 million pounds from UK users. The tax base is the income of UK users, and the tax rate is 2%. HMRC believes that by the end of fiscal year 2025, this tax may bring additional annual revenue of up to 515 million pounds (about US $665 million).

First, let's look at what is' digital tax '.

Digital tax refers to the national tax on digital services sold by multinational corporations in a country through overseas subsidiaries. This new tax is different from the corporate income tax that many companies have paid. It is widely called digital tax and sometimes called 'digital service tax'.

At present, more than 30 countries have collected digital taxes in different forms. The UK's approach is to tax the operating income of digital enterprises in full, which is similar to the current withholding income tax. EU countries mainly use this method. Of course, now the UK does not count.

The UK's digital tax threshold is super high, which is applicable to enterprises with global sales of more than 500 million pounds and at least 25 million pounds from British users, and the first 25 million pounds of income from the UK is tax-free. It can be said that it is specially tailored for various' Irish sandwiches' such as GAFA (Google, Amazon, Facebook and apple), but American network giants who do not pay taxes in the UK. It doesn't matter if ordinary small and medium-sized start-ups can't reach the threshold at all.

Second, why does Britain impose a digital tax?

2018 Jonathan & middot; Jonathan Haskel and stian & middot; Stian Westlake published capitalism without capital: the rise of invisible economy, which tells about a quiet revolution in the early 21st century. For the first time, major developed economies began to invest more in intangible assets, such as design, brands and software, rather than tangible assets, such as machines, buildings and computers. For all types of enterprises, the ability to deploy assets that are neither visible nor tangible is increasingly a major source of long-term success. But this is not just a familiar story of the so-called new economy. Capitalism without capital shows that the growing importance of intangible assets has also played a role in some of the larger economic changes of the past decade, including the growth of economic inequality and the stagnation of productivity. "

In the past, when we talked about the large network companies in the United States sweeping the world, we often thought that the population of languages such as Japanese, French and Korean was too small to support a complete software system, so we mainly used American Internet products. However, the British example can not prove this. It uses the same language as the United States and has a deeper historical accumulation, but it is also defeated by the American network software, and even the most basic tax right can not be realized. Therefore, the real reason why most countries are swept away by American Internet giants may not be objective factors such as language and population, but only superpowers can sit on the card table, and others have been cleared.

Let's take social networks as an example to briefly explain why American Internet companies do not pay taxes in Europe. As shown in the figure below, it is assumed that the overseas social network platform builds social network software for domestic users, puts advertisements on the software, charges from overseas advertisers, and all cash flows occur overseas. Although domestic users use software to watch advertisements, they do not bring income to any domestic companies, so they naturally do not pay taxes.

Author mapping

Traditionally, according to Adam & middot; From the perspective of "all taxes come from income", the cornerstone of Smith's tax theory, these countries swept by American Internet giants have no companies to obtain income or pay costs, so there is no way to obtain tax revenue through turnover tax, income tax or withholding tax. Finally, we can only break the traditional tax principles to levy digital tax.

Thirdly, the collection of digital tax subverts the tax principles recognized all over the world.

The traditional international tax principle is to 'ensure that profits are taxed where economic activities occur and where value is created', which brings two great challenges to the collection of digital tax.

On the one hand, whether the interaction between users and enterprises constitutes economic activities such as reciprocity. For example, social networking companies themselves only provide software platforms and do not produce content. The content on the software is uploaded by users for social networking. The photos and videos uploaded by users are for social purposes and have nothing to do with tax purposes. They are not consciously creating profits for the software platform, and their contribution to the profits of the platform can not be reliably measured. Therefore, it is controversial whether this behavior of publishing text, pictures and videos on software and communicating with friends or strangers is regarded as an economic behavior of interacting with software companies or a one-way software use behavior.

On the other hand, whether value creation occurs in the user's location.

According to the value chain analysis of traditional industries, users can only play an indirect or auxiliary role in the whole value chain of software enterprises, such as strategic decision-making, investment and financing, brand construction, R & D, promotion, upgrading and after-sales service. User participation and creating core value for enterprises do not constitute an inevitable link. But at the same time, the value created by a large number of users through the use of software to publish content is crucial to the success or failure of social networking software. Therefore, whether value creation occurs in the user's location is also a huge controversy.

Finally, the British government believes that user participation in creating value for enterprises is mainly reflected in four aspects:

1. Users use platform software to submit and generate digital content;

2. Users continue to invest time and deeply participate in the construction of the platform;

3. The network and externality of user experience create excess profits for platform enterprises;

4. The content and services provided by user participation highlight the core value of the platform enterprise.

For digital enterprises that meet the above four conditions, the British government believes that the current profit distribution rules should be modified to be consistent with the core concept of "place where economic activities occur and place where value is created".

Finally, let's take a look at the efforts of the international community to deal with the digital tax on the whole tax rules.

In 2015, OECD and G20 launched the tax base erosion and profit transfer (BEPS) project. The first of its 15 action plans is to deal with the tax challenges of the digital economy, but it only raises problems and has no practical solutions. After various meetings and discussions, the latest phased result is that on May 31, 2019, OECD issued a work plan entitled "forming a consensus solution to the challenges of economic digitization and taxation".

'the two pillar plan contained in the work plan is committed to solving the tax challenges brought by economic digitization from two levels.

Pillar 1 plan points to the division of tax jurisdiction, and will revise the profit distribution rules and connection rules to form the concept of "new tax right" and new "taxable existence" or "taxable source";

Pillar 2 plan aims at the remaining BEPS problems, which will change domestic laws and form two policy options: global minimum tax and tax base erosion payment and taxation. "

If we simply describe those astringent terms, my personal understanding of the two pillar method may be like this.

Pillar 1 is to redistribute the global tax right and tax according to the place where goods or services are sold. Even if a company has no entity in the country and no cash flow flowing in or out of the country, it may have to pay tax in the country.

Pillar 2 scheme is the long-standing efforts of the two organizations. In order to combat the retention of profits in low tax rates or offshore havens, the lowest tax rate shall be implemented in the world. The actual income tax rate of any country shall not be lower than this rate, which is the fundamental method for global tax avoidance.

If scheme 1 is to be realized, it needs to reconstruct a full set of new international tax system, including the division of tax interests of various countries, new association rules, double taxation and tax dispute resolution mechanism among countries, etc. it may also need a lot of theoretical innovation similar to the value chain system, which is still in the exploratory stage.

Option 2 is feasible and can cure the root causes, but global action is needed to stop harmful bottom-by-bottom tax competition. This method may have been put forward for decades. Because there are a large number of small countries with money laundering and tax avoidance as the main financial source in the world, it may be very difficult for these countries to give up their core national interests to safeguard the tax interests of large countries.

Due to the specific national conditions, China is one of the few countries in the world that has an independent and complete Internet software ecosystem. Many products of global popular Internet companies cannot make profits in China. Therefore, there is not much discussion on Levying digital tax in China. But as China's software enterprises go out, such as WeChat's weChat, Tik Tok and other software tiktok is also hot around the world, it is likely to face the possibility of collecting digital taxes by other countries. Enterprises going global may have to make relevant tax planning in countries where digital tax is levied, and fully consider the impact of tax cost on enterprise operation.

In short, the essence of the digital tax now levied is the harvest of major developed countries in the world against the digital hegemony of the United States, and the response idea of the United States is to expand the digital tax problem and drag intangible assets and even interest into the system, which makes the problem more complicated, so that an effective consensus can not be reached for a long time. At present, the proposed two pillar method either has a lot of unsolved complex technical problems in theory, or has great practical resistance in implementation. Therefore, although the digital tax itself brings the challenge of subverting the traditional tax rules, there may be a long way to go to deal with this challenge.