Philip Hammond’s proposals to introduce a digital sales tax on technology firms will face tough opposition, as the industry warned a similar EU measure could inadvertently damage European companies.
Microsoft, Facebook and Google expressed confusion over the chancellor’s plans and told the House of Lords’ communications committee they needed further clarity about what the tax would entail.
The chancellor on Monday announced his intention to introduce a levy on tech companies that earn substantial revenues in Britain but pay limited amounts of tax, with the intention of raising £400m a year by 2020.
Katie O’Donovan, the public policy manager for Google UK, said whatever the final version of the tax looked like, the UK must make sure it sticks to Hammond’s promise that the tax is only a stopgap until the introduction of internationally agreed standards for taxing digital companies.
“The chancellor referred to his proposals as part of setting a timeline for international action and that’s always been something that we’ve supported,” O’Donovan told the committee. “For a company like ours … or indeed for many companies that operate across borders and in different countries, a multilateral international solution is one that will be really meaningful with long-term significance.”
Microsoft’s UK director of corporate, external and legal affairs, Hugh Milward, said the company was “digesting what it was that the chancellor announced yesterday”, but agreed with Google that “the most important thing is how this influences what the OECD is thinking and how the OECD is going to influence what the chancellor decides to do.”
The Organisation for Economic Cooperation and Development (OECD), which advises on international taxation, is working to agree a global system on taxing digital firms’ profits. But the UK and EU have become frustrated with its progress, prompting them to come up with their own proposals.
Neither representative from Google or Microsoft was able to tell the Lords what proportion of the companies’ current British revenues were paid as tax, and nor was Facebook’s Rebecca Stimson, its UK head of public policy.
Separately, a similar tax proposed by the EU has come under fire from smaller tech companies, who warned Brussels’ plan could inadvertently damage their businesses, while the extra cost could be easily absorbed by the likes of Facebook and Google.
Executives of 16 European tech companies including Spotify and Booking.com said that while the EU plans, backed by the French president, Emmanuel Macron, were “designed with large and highly profitable companies in mind”, the EU proposal is likely to have “a disproportionate impact on European companies”.
The 16 companies argue this is because they do a greater proportion of their overall business in the countries where the taxes would be collected.
Their letter, sent to EU finance ministers, warned a new levy could result in double taxation for some businesses and might trigger retaliatory measures from other countries. They urged ministers “not to adopt a measure which would cause material harm to economic growth and to innovation, investment and employment across Europe”.
The responses show the challenge of extracting revenue from US-based tech companies without restricting the growth of European businesses, as governments grapple with the best way of taxing those who can operate in a country while having a limited physical presence.
The UK and the European commission have said they would prefer to reach an international agreement on the taxation of tech companies but are reluctantly willing to go it alone.
One significant issue on reaching an international arrangement is that the US has become increasingly protectionist under Donald Trump, making it more difficult to come to an agreement that could hit US businesses’ bottom line.
Hammond said his proposed UK tax would be “carefully designed to ensure it is established tech giants, rather than our tech startups, that shoulder the burden”, but details on how it would achieve this remain unclear.
The proposed tax would take 2% of UK revenue from companies with more than £500m of global income in three sectors: search engines, social networking, and online marketplaces. Companies would be exempted if they were not profitable, the Treasury said, but gave no further detail about how it defined those sectors.
