The UK (and Belgium): Digital Services Tax – A Stick or a Carat
In 2016, Belgium introduced an alternative tax regime applicable to the diamond sector. Ordinarily, corporate tax is levied on a Belgian company’s profits. However, due to the difficulty of accurately valuing diamonds and the fact that at a wholesale level stones are bought and sold as commodities making it difficult to trace in the accounts of the traders, it was felt that tax revenue was being lost and the sector was not paying its “fair share”.
The “Diamond Regime” or “Carat Tax” was therefore introduced with the aim of ensuring the tax base of diamond traders could be easily calculated without the need to value the diamonds in the traders’ accounts. This is achieved by calculating the trader’s gross profit based on a fixed percentage of turnover, which also results in a fixed calculation of the value of stones purchased and the variation in the inventory during the accounting period (cost of goods sold). Under the regime, a trader’s gross profit margin is fixed at 2.1% of its turnover. After deduction of expenses the net taxable income cannot be lower than 0.55% of turnover.
At a time when the European Commission is fervently pursuing State Aid claims, it’s interesting that the Carat Tax received the greenlight on the basis that it does not selectively favour diamond traders over other businesses (including within the diamond sector itself), which are subject to the normal tax regime in Belgium and that it reduced the complexity faced by the traders. It has been reported that the Carat Tax has resulted in the sector paying significantly more tax than prior to the introduction of the new regime.
Which brings us on to the Digital Services Tax and the problem tax administrations are having at getting tech companies to pay their “fair share”. Earlier this month it was widely reported that Amazon would not have to pay the DST on the goods it sells directly to customers, but on the service fees that companies such as Amazon and Google charge third parties for using their platforms. Given the difficulty in taxing tech companies, as Amazon is showing by passing the DST costs onto the third parties who use their platform, perhaps the DST isn’t the right stick and a Carat should be used instead? [ED: Even by our exacting standards that joke is a bad one.] The question of State Aid would have to be addressed, of course, but given that a tax on turnover would undoubtedly increase the tax paid by the likes of Amazon in the UK, and the playing field would be levelled up, perhaps it’s time to think about alternative ways of taxing tech?
If you think you would be impacted by these possible changes and would like to discuss, or if you have any questions on the above, please do not hesitate to contact Miles Dean.