In what amounts to a shot across the bows for US tech firms, the UK government has announced a new 2% ‘digital services tax’ on their revenue, rather than their profits.
Concerned that many such companies book their profits in lower-taxed countries outside the UK – and keen to be seen to be doing something about it – chancellor Philip Hammond yesterday suggested that the tax would apply to profitable firms with global revenues of at least £500 million ($640 million).
“Digital platforms delivering search engines, social media and online marketplaces have changed our lives, our society and our economy, mostly for the better. But they also pose a real challenge for the sustainability and fairness of our tax system; the rules have simply not kept pace with changing business models,” he said.
“It is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here with respect to that business.”
As envisaged, the tax would apply to firms such as Facebook, Google, Twitter, Apple and Amazon, as well as the likes of AirBNB and Uber.
Hammond said the levy would not take the form of a sales tax on goods ordered online, as this cost could then be passed on to the consumer. Instead, it will ‘apply to revenues from those activities that are linked to the participation of UK users’.
He added that he expects to raise around £400 million ($512 million) per year.
However, the plan is a lot less settled than it might at first appear. The tax isn’t set to come into force until April 2020, with Hammond saying that the government plans to consult on the detail in the meantime.
It’s also possible that the move will be overtaken by events elsewhere in the EU. Earlier this year, the European Commission released draft proposals for a similar tax on tech companies which would see them paying a rather higher 3% on gross revenues based on where their users are located.
This may be the reason that Hammond is apparently unafraid that the Trump administration could interpret his new tax as an attack on US firms. While Hammond is keen to convince British voters that he’s doing something about the ludicrously low taxes paid by firms like Facebook and Google, uncertainties over Brexit mean he can’t afford to risk alienating a potential ally. President Trump, after all, doesn’t take kindly to anything that can be seen as an attack on US business.
But if the EU comes through with its 3% tech tax plan, the British government can claim that it was ahead of the curve, and tough on tax avoidance – while simultaneously assuring the US that it’s being far less greedy than the EU.
In the longer term, it seems clear that the tech firms won’t be able to carry on shuffling profits around the world to their own advantage in the way that they have been used to doing so far. But the chances of this digital services tax coming into force in 2020 in its present form are pretty low.