It's Time To Tax Google And Facebook -- But How?

The tech giants have been warned time and time again about how they run their services and how they file their accounts at the end of the year. The tiny fraction of corporation tax, compared to overall revenue, is always shocking. Somehow, the tech giants seem to submit accounts that suggest they owe tens of millions in tax instead of the hundreds of millions of pounds one would expect from revenues amounting to several billions. 

Apparently it is mostly legal, if not particularly moral. I say mostly because the tech giants are now finding Her Majesty's Revenue Service (HMRC) are requiring that they pay some back tax. It's all pretty minor accountancy stuff compared to the overall question of why the tax bills are so low in the first place.

Considering that Google and Facebook account for more than a half of British digital advertising revenue, it sticks in the craw. 

It is what makes the current conversation of how to bring in more tax from the giants so interesting. The latest idea doing the rounds at Whitehall is to forget profit altogether because the tech giants are adept at accounting for it in such a way it that it gets taxed elsewhere. 

No -- if you want to hit the giants, you go after revenue, not profit. That is what the UK Treasury is considering, and it's an idea that has been considered across the EU -- particularly in France where the authorities are pondering whether it should be as low as 2% of turnover or as high as 5%.

The Telegraph has some fascinating statistics on what can happen if revenue is taxed at 5%. Google's tax bill goes up seven times, and Facebook's by a factor of 17.

The plans are reported as being at a very early stage, and I would wonder whether any British government would have the tenacity to see the changes through. After Brexit, politicians will be keen to portray the UK as still being a leading light in digital business and would not want adverse headlines detailing how the giants are relocating.

The arguments that will no doubt be raised remind me of ad blocking. On the one hand, by sticking up for yourself and asking people to play the game fairly, you risk losing them altogether. On the other hand, you have to question whether it was worthwhile having them in the first place if they were just after a free -- or cheap -- ride.

I suspect that taxing revenue will set a dangerous precedent because the same approach would have to apply to other players in digital advertising who may well currently be paying their fair share. 

What is probably happening is that EU governments are just so fed up with the tech giants sucking money out of their digital industries and not paying their fair share of tax that they want to make it look as though they are "tooling up" to take them on. The ensuing debate will doubtless provide an opportunity to remind the tech giants that the ball is in their court. They can choose to take away the need for new tax arrangements by simply paying their fair share voluntarily. 

Sadly, I very much doubt this will happen, and I very much doubt the remedy of taxing revenue will be imposed and we will still be having this same debate in ten years' time. 

What I can potentially see is a sales tax being applied to digital advertising. VAT already exists, but a sales tax would need to be designed so businesses cannot register to claim it back. This would hit every player equally and would bring down profits, obviously. For those paying their fair share already, it would be like a pre-payment of tax and, for those using smart accountants to avoid UK tax, there would be little room for manoeuvre because their inventory would already have been taxed at every transaction. 

It may seem drastic, and again, it is hard to see a Tory government bringing in a new tax on digital business -- and if Labour were in power, it's more likely that the tax system would be overhauled and another game of cat and mouse would begin with cunning, tax-avoiding accountants. 

Again, we're probably talking about consultations and threats, and ultimately, the game changing -- but the result would remain largely the same for the foreseeable future.

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