The technology titans will not be trembling in fear. The sum of £400m that Philip Hammond says will be raised annually via his new digital services tax is a relative trifle. Even if the tax is concentrated among a small group of global companies, which seems to be the chancellor’s plan, the likes of Amazon, eBay, Facebook and Google can afford to pay. One suspects their enthusiasm for investing in the UK will not be affected one jot.
But the firms will be irritated by the UK’s go-it-alone approach. Hammond, assuming his plans are not watered down, will have demonstrated that countries do not have to wait for international agreement on how tax rules should be updated for the digital age. New taxes can be invented unilaterally, in this case a 2% charge on the UK revenues of “specific digital business models”, meaning search engines, social media platforms and online marketplaces.
Hammond, after muttering vaguely for ages, deserves credit for finally taking the plunge. The EU’s equivalent proposal for a 3% tax on revenues is currently bogged down in internal bickering and worries about a backlash from the US since most of the affected companies will be American. If the chancellor get his way, the UK’s digital services tax will be up and running from 2020.
The moral case for addressing the undertaxation of big tech is overwhelming. It was demonstrated most recently by Facebook. A UK corporation tax bill of £15.8m was “correct” in the sense that equated to the roughly the right figure on declared UK profits of £62m. But the unexplained element in the accounts was the low level of UK profits. On revenues of £1.27bn, the UK profit margin was just 4.9% versus that 50% that Facebook, as a whole, achieved globally last year.
One would expect a difference of some size, but the vast chasm at Facebook suggested the group’s internal trading arrangements are designed to depress profits in the UK. The process will be entirely legal, but a UK chancellor cannot simply ignore the loss of revenue from activity that plainly derives from UK users.
The companies cannot complain in good faith. Their executives usually bleat that they play by the tax rules as they find them, and that if politicians want a different system they should change the law. Now a UK chancellor is proposing exactly such a reform. Taxing revenues, rather than profits, breaks new ground, but the tech giants have brought this approach on themselves with their arrogance and lack of transparency of where profits are truly created.
Hammond, at first glance, seems to be alert to the danger that intervention could kill investment in the UK’s broader digital economy. The digital services tax is clearly aimed only at large companies – those with global revenues of £500m-plus from “in-scope business models”. There is a “safe harbour” get-out for firms that genuinely have very low profit margins. And the Treasury says it is “not a tax on online sales of goods”, presumably because the cost would just be passed to consumers. Instead, revenues from intermediating sales are the chancellor’s target.
Those principles still have to be turned into a workable policy that can withstand a real-world encounter with the tech firms’ tax-planning departments. And, to repeat: £400m is probably a long way short of being a “fair” tax on the profits created in the UK. But at least Hammond has made a start.
