Wednesday, November 23, 2022

Sorry to dampen the joy over the UK's Digital Services Tax having exceeded targets, but part of it is paid by app developers, even tiny ones: the CMA could and should end that monopoly abuse

A UK government agency--His Majesty's (HM) Revenue and Customs Department (HMRC)--today released a "Value for money" report following an investigation into the impact of Britain's Digital Services Tax (DST). The announcement celebrates that HMRC "received £358 million in DST receipts for the 2020-21 tax year, which was 30% more than forecast"--and, as the Guardian notes, DST has "rais[ed] more from most of the digital businesses than they have been paying in UK corporation tax."

I wish I could say "great success to you." But I can't join in the congratulations as long as the UK doesn't fix a fundamental flaw of its DST.

What is DST really meant to accomplish? To tax extremely large and profitable companies. But in reality, it also affects app developers, even the smallest ones among us. Today's announcement says how it should work in theory, and I'll then explain why it doesn't work exactly as intended in practice:

"DST is designed to tax business groups that derive large revenues from UK users of search engines, social media platforms and online marketplaces. It taxes the revenues (rather than profits) derived from these activities at a rate of 2%. The DST is levied on business groups (groups of companies with the same controlling interest) rather than each individual company. Groups are liable to pay DST if their worldwide revenues from in-scope activities are more than £500 million and more than £25 million are derived from UK users." (emphases added)

The one swho should be taxed here are Apple, Google, Amazon, Meta, and eBay (that's the list I found in today's UK Tech News article on DST).

Now, I'm not complaining about the fact that companies with market power can ultimately pass those taxes on to consumers. That is also a reality, but it would apply to any tax. The DST-specific "bug" that needs to be fixed is the following:

App store revenues (whether we're talking about Apple's App Store on iOS or the Google Play Store for Android) are split between their operators--the platform duopolists--and app developers using a certain percentage. There's a 30% commission that Apple and Google impose on the revenues of app makers that make more than a million per year, and 15% for the little guys, which on average means that the commission is still close to 30%. Value-added tax (VAT) or its U.S. equivalent called sales tax obviously reduce the amount that can be split, and that is totally fair because those are taxes on sales (not profits) and they are levied on everyone, meaning that even very small app makers would have to pay them.

But Apple deducts DST from the amount it distributes (minus the commission). I haven't checked on whether Google does so as well, but in Apple's case it's a known fact.

Last year I already explained that the App Store tax (that applies to the bulk of the transaction volume) exceeds 30% in some jurisdictions: in reality, it's 31.5% in the UK (not 30%), and even 35.25% in Turkey. It means that app developers have to pay their share of Apple's DST--and practically no app maker would actually owe DST-- probably not even a company like Epic Games would meet the criteria. That's because DST is based on a mix of qualitative (business model) and quantitative (revenue thresholds) criteria. In some countries, there are special VAT rules that work like DST, but in the UK, there is a clear distinction between VAT and DST.

South Korea's antitrust authority--the Korea Fair Trade Commission (KFTC)--raided Apple's Korean office about two months ago for a somewhat similar reason. In South Korea, app makers effectively pay a 33% app tax because Apple charges app makers a 30% commission on the price paid by end users, which includes VAT.

The UK's Digital Services Tax was not meant to tax the little guys. The idea was that Apple and Google would pay the 2% out of their 15% or 30% app store commission. The way to prevent Apple (and, should it apply to them as well, Google) from passing on 15%-30% of their DST is to enforce the antitrust laws against them. If developers could do their own in-app purchasing (IAP) transactions, virtually all of them would not owe DST, and that's why it's unfair to let them pay (in part) a tax that was never designed to apply to them.

The UK's Competition & Markets Authority (CMA) could address this issue--and correct the only major design flaw of Britain's DST, a loophole that Apple is shamelessly abusing.