Time’s up for tech giants to avoid higher taxes. While they were once upon a time a startup, a growing number of policymakers and commentators are arguing that now mature and established tech players should be subjected to a “digital service tax” as current 100-year-old tax protocols grow increasingly unsustainable and unfair. This report looks to further expound on the impacts digital tax reforms will have on the technology sector.

The targeted multinational tech companies are known as “FAANG” - Facebook, Amazon, Apple, Netflix and Alphabet - owned by Google, which altogether are part of an over US$3 trillion-dollar- club.

Collectively, Facebook, Apple, Amazon, Netflix and Google are worth a staggering US$3 trillion.

The total value of the five companies amounts to a whopping 15% of total U.S. GDP. But despite soaring revenue, a report conducted by the European Commission found that the effective tax rate for digital companies was less than a half compared to traditional companies, stirring digital discords amongst the public and government officials alike.

So why have these large tech firms been paying such low tax? This has to do with a loophole in current tax protocols that are failing to keep up with a fast-pace digital age. In our report, we found that companies like the “FAANG” fall under the “profit tax” bracket, meaning their global subsidiaries’ profit would be taxed at different rates across the world. As the current tax structure stands, multinationals are in a position to decide whether its customers are to be served by a local subsidiary, or any other global jurisdictions that has more favourable tax policies. Through careful tax optimization, it’s estimated global tax revenues lose an estimated US$500 billion from multinationals.

“It’s estimated global tax revenues lose an estimated US$500 billion from multinationals.”

With such a substantial loss, countries are now looking to tighten the belt on tech tax regimes. The U.K. is clamping down on these tech titans, introducing a digital services tax to be taken into effect by 2020. Philip Hammond, Britain’s Chancellor said, “The UK has been leading attempts to deliver international corporate tax reform for the digital age. A new global agreement is the best long-term solution. But progress is painfully slow. We cannot simply talk forever. So we will now introduce a UK digital services tax. It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.”

“It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.”

Current EU proposals will see a 3% tax on EU-generated revenues on online placements of advertising, user data sales and digital platforms that facilitate interactions between users that generate an annual global revenue greater than EUR750 million. This is expected to rake in EUR5 billion in digital services tax a year.

But in our report, we found that the imposed 3% digital tax rate would only decrease the companies’ net profit less than 1%.

Source: Company Report

While companies like Apple has relatively high revenue exposure to the EU, the revenue contribution from direct online sales was only 15%, making the impact on Apple less under the digital services tax. But it is important to note that the number does not reflect the impact on Apple’s distributor which accounts for nearly 70% of Apple’s total revenue. Moreover, if a global digital tax agreement were passed, net income can potentially be severely impacted.

The OECD believes that over 100 countries would figure out a consensus-based solution on how to tax digital business across borders by 2020. With a growing uniform digital tax consensus, it’s time for tech giants remember once again, nothing can be said to be certain, except death and taxes.