THE US IS NOT ABOUT TO GO TO WAR WITH FRANCE OR THE UK!

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THE US IS NOT ABOUT TO GO TO WAR WITH FRANCE OR THE UK!

I subscribe to the Centre for Policy Studies, which is a Conservative leaning think tax.  I am not a Conservative Party member, but the CPS produces some interesting publications.  It also produces CapX, a daily briefing of interesting articles on a range of subjects.

A recent CapX article was, “The International tax system is changing – should the US sign up?”  This was written by two officers of The Tax Foundation, a US think tax, whose website describes as “the nation’s leading independent tax policy non-profit”.

The article starts “The United States has often been asked to pay a price for peace” and ends, “As countries around the world assess their own positions relative to the French digital tax and the OECD proposals, it will be important for the US to lead by recognising the price we are willing to pay for peace and working to ensure that peace is lasting”.  Leaving aside the melodrama – I doubt that the French digital tax (or any other country’s) is a declaration of war against the US – what struck me about the article is that it is almost wholly wrong.

An early paragraph tells readers, in relation to the OECD, BEPS project, that “Rewriting the international tax rules means I …focus on taxing profits where goods or services are designed or produced.  But profits from intellectual property and digital products can be difficult to tax because, at the moment, companies can often shift their profits to lower tax jurisdictions”.  Remarkably for a think tax that claims to be a leader in tax policy, that is almost wholly incorrect.

Firstly, the OECD is not rewriting the international rules.  It said at a fairly early stage in the BEPS project that it thinks that, by and large, they are still fit for purpose.  It is however making some tweaks to them that it hopes will largely eliminate the scope for tax havens.

Secondly, the current rules do not focus on taxing profits where goods are designed or produced.  They focus on taxing them where the profit is made, which in most cases is where the goods or services are sold.  Of course, with international trade, that begs the question of whether goods or services are sold where the seller is or where the buyer is.  The system has opted for the former except where the buyer has set up shop in the purchaser’s company.  For example, I like jazz.  I recently bought some records from a smallish record company in Chicago.  To do so, I found that I could not buy what I wanted through Amazon.  I therefore searched out the record company’s website.  They were happy to sell me the records but only if I paid for them to ship them to the UK.  The profit they made from me is taxable on them in the USA.  That seems to me to be reasonable.  They did not try to sell records in the UK.  I had to go to them to buy.  As far as they are concerned, they do not care where I am.  Why should they pay tax in the UK?  Of course, that is tax on the profit; customs duties and VAT are different.  The Royal Mail had to pay those to import my records and would not deliver the records to me until I reimbursed these taxes to them.

Suppose the record company open a shop in the UK.  In that event, if I bought my records in their UK shop, both seller and buyer would be in the UK and it would be reasonable for the UK to tax the retail profit which arises in the UK and for the US to tax the manufacturing profit which arises in the USA.  That is exactly what happens.  There is no intention to change that, but the OECD has tightened the rules to make it clearer where the profit arises if, for example, the US company were to put its copyrights in a tax haven and seek to attribute a large part of its overall profit to those copyrights.

Which brings me to the third point, which is that a digital services tax is not aimed at tax havens.  It is based on the proposition that the current rules do not work in relation to some types of digital income.

I am a baseball fan.  I support the Chicago Cubs.  I visit Chicago every year and try to take in a couple of Cubs games.  But there are 162 games in the baseball season.  Happily MLB (Major League Baseball, which controls and ultimately owns baseball) does live video broadcasts of all of the baseball games in a season.  It has sold me for a fairly modest figure the right to watch all of the Cubs games on my computer.  Again, it is surely right that the US, not the UK, should tax my subscription to MLB TV.  Both the games and the broadcast takes place in the US.

A baseball game consists of a minimum of 18 innings (9 for each team – it is often more as a baseball game cannot normally end in a draw; they keep playing extra innings until one team wins).  There is a gap between each inning.  MLB describe this as an advertising break.  So that I don’t get bored, they normally fill that 3 minutes or so with highlights from previous baseball games.  But every so often there will be an advert.  This will not be an advert by a US company; it will be an advert by a UK company.  Similarly, if I look up the Chicago Cubs website I will, of course, have to put up with a number of adverts.  These will be UK adverts, not US ones.

This is the issue at which France’s digital tax is aimed.  If an English company pays MLB or the Cubbies a fee to allow it to target an advert at me in England, it is much less clear than when I buy my jazz records that the profit arises in the US.  Someone in the UK is trying to entice a UK resident to buy a product in the UK.  The only connection with the USA is that the owner of the medium on which the advert is placed happens to be in the US.  There is a great deal of logic in the UK (or France, as the case may be) claiming the right to tax the profit made from allowing the UK company to solicit my UK custom.  That is what the digital tax seeks to do.

My understanding is that the US tax authorities are sympathetic to that view.  They are not in principle opposed to the advertising revenue (or at least part of it) being taxed in the UK instead of the USA.  What they object to is overseas countries jumping the gun and creating special taxes that, in practice, are payable only by large US companies.  They do not object to the OECD developing a principle that advertising revenue from websites should be taxed where the advertiser, or possibly the advertisee, is based.  But they want an international agreement that applies to everyone; not special taxes with massive de minimis exemptions so that they apply only to big US IT companies.

Pushing for such an international accord and pushing back against unilateral taxes aimed only at US companies does not seem to me an unreasonable stance for the US government to take.  It is hardly a declaration of war!

ROBERT MAAS