Turkey threatens 38% VAT on Twitter ads
As part of a fractious negotiation between Twitter and the Turkish authorities, the Finance Ministry has suggested that Turkish VAT should be doubled from 18% to 36% on domestic advertising in an effort to recoup local tax revenues from the non-resident social network site.
This follows a confirmation from the French tax authorities that it is attempting to levy additional taxes on Google as it seeks to increase revenues from the French activities of the online search and advertising group. Italy recently abandoned a plan to force all Google Adword income to be booked exclusively through Italian ad agencies, thus bringing it inside the Italian corporate income tax net.
Non-resident digital services avoid direct taxes
Under international tax treaties and guidelines (e.g. OECD VAT guidelines) non-resident companies providing digital services to taxable persons as well as consumers are not liable to direct tax – Corporate Income Tax. Typically, only if a ‘permanent establishment’ or ‘nexus’ is formed in the country can the country then levy direct taxes on any local income. This is because direct taxation is charged at the location of the provider of the goods or services – the origin principle.
However, indirect taxes such as VAT or GST are mostly due in the country where the consumption takes place – the destination principle. In the fast growing digital economy, where many services can be provided to businesses and individuals from out-of-country, this means most governments can only collect any share of tax from income via indirect taxes like VAT on their consumers.
Turkey seeks tax revenues through VAT
Turkey has been pressurizing Twitter to form a local branch or subsidiary in Turkey in the past few weeks to enable direct taxation of the ad revenues on the platform. In an attempt to encourage this, the Finance Minister suggested last week that the standard VAT rate of 18% be doubled to 36% for advertising placed on Twitter.
The government estimates that Twitter earns up to US$35m per annum in Turkish ad income.
France tackles Google non-resident revenues
Google last week confirmed in its regulatory filings that it expects a major tax demand from the French tax authorities which believes Google’s complex multinational tax structure is legally diverting income out of France and avoiding corporate taxes.
Italy drops VAT demands on Google ads
It a move mirroring the Turkish Twitter proposal, Italy drafted a Bill at the end of 2013 to force all Google Italian Adwords revenues to be booked through companies with a resident Italian VAT number. This would impose Italian VAT at 22%. Currently, under the EU single market framework, such expenditure is booked in Google’s non-Italian operations. This is permitted under the EU freedom of services regime.