The UK is planning to introduce a "narrowly targeted tax" on major tech companies, which will come into force around April of 2020. This will be a first-of-its-kind tax on locally generated revenue by large tech firms. Companies such as Facebook
Large tech firms have been criticized for reporting a relatively small amount of their profits in local jurisdictions. Countries have come together to figure out a standardized process of how to organize this digital tax, but progress has been slow. The new digital tax UK plans to enact has placed pressure on other countries, including the US, to speed up the standardization.
Talks of further potential digital taxes are being led by the OECD, Organization for Economic Cooperation and Development, a forum of wealthy countries. The OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) first floated the concept of digital taxes in 2013. BEPS lays out an action plan to realign contemporary tax policy with the reality that the economy is becoming more global and digital. However, without any real enforcement power and a struggle to build consensus among 110 members, the OECD has not been able to make much progress.
The first move on digital tax in fact came from the US. Although the tax did not specifically target large tech companies, it introduced a new provision called Global Intangible Low Taxed Income (GILTI). This created a new category of foreign income for US shareholders that own 10% or more of a foreign corporation's Qualified Business Asset Investment (QBAI), which is the fixed, intangible assets of the company. This gave the US more taxing power on intellectual property, which many tech firms have historically housed abroad to benefit from low taxes.
Under international tax principles, income is taxed where value is created, but for tech companies that boundary isn't always clear. Services such as ads and reserving taxes are delivered digitally from the other side of the world by companies that pay little income tax locally. US tech companies quite often report little profits and thus pay little income tax in the countries where they sell their digital services. This is because the customers in those countries are buying from a company unit often based in a low-tax country. The in-country unit operates marketing and support while the overseas unit (US) is the one that actually makes the sales and reimburses the local unit for expenses, leaving little taxable income.
Now, countries such as India, Spain, South Korea, and even Mexico, Chile, and other Latin American nations are looking to introduce a digital tax and boost tax revenue from foreign tech firms operating within their borders. The taxes will be imposed on revenue rather the profit of tech companies and will be separate from corporate income taxes many companies already pay. Europe is the largest overseas target for many tech firms and the EU has estimated that its digital tax proposal would bring in about £5 billion ($5.7 billion) annually. These taxes could bring in even more money in Asia, where tech companies have seen a growing market.
Some European countries have expressed their opposition, but have stated that they're prepared to act unilaterally. Ireland, for example, still remains opposed, as it hosts the EU headquarters of many tech behemoths due to their favorable tax rate. The tech industry has of course opposed the proposals. After the UK announced its plans, the Information Technology Industry Council, a Washington, DC-based lobby group that represents tech firms including Google and Facebook, has stated that "imposing a digital tax could create a chilling effect on investment in the U.K. and hinder businesses of all sizes from creating jobs."