Chancellor Gambles On A 2% Digital Tax For Tech Giants

The Digital Services Tax is on. The tech giants pleaded with the the Chancellor last week not to push ahead, but yesterday, in the budget, Philip Hammond signalled he was fed up with talking with other countries about a levy and the UK would act alone.

The new tax is being presented as one for the big tech companies, rather than start-ups. There will be a process of consultation, but at the moment, the Chancellor is suggesting that it will impact tech businesses with global sales of GBP500m. According to documents produced alongside the budget, the current proposal is that the tax will be rated at 2% and will target tech giants engaged in display, search and social advertising as well as those that facilitate transactions between UK consumers. 

The tax is expected to raise GBP400m -- which, although a significant sum, is hardly likely to be high enough to force tech giants to consider quitting a market as lucrative as the UK. The Telegraph even quipped in its daily technology email that the tax was the equivalent of the Chancellor walking up to Amazon with a loaded gun and shouting, “give me 0.039pc of your global revenues.”

Clearly, the Chancellor is hoping that by entering a period of consultation before an introduction of the tax, expected to be in 18 months, other countries will have had time to also consider following the move. A digital services or sales tax has been discussed in Brussels, and so it is possible that other countries will see the UK's action as a trigger to introduce a similar charge.

There are those, outside the tech giants, who believe the UK is wrong to act on its own because a digital tax should be rolled out universally and it sends out the wrong message about Britain wanting to be a tech powerhouse after leaving the EU. However, it is fair to say that there is also support for the Chancellor.

This column has frequently pointed out how riled the UK and the rest of the EU are with tech giants that suck money out of advertising markets yet do not appear to pay their fair share of tax in the country where the revenue was generated.

Given the sophistication of accounting practices that can legally move funds to lower taxation regimes, it is hard to imagine what else the Chancellor could do, other than impose a direct levy and then refer to it as a "services" tax so consumers don't feel like this is a thinly disguised rise in VAT.

The truth is that the tech giants have known for some time that their accounting practices would force a European government to shift from taxing elusive profits to focus instead on direct sales, which are harder to account for in a third-party tax regime. 

In a way, Hammond became a gambler yesterday. The generosity around tax bands and the handout to the NHS were based on positive economic predictions becoming true and an orderly Brexit not affecting trade. Both are very big "ifs." He also gambled that taking GBP400m off the tech giants would be popular with the British public and that it wasn't too high a sum to retaliate by moving HQs out of Britain. He is further gambling that EU countries don't try to poach the tech giants to set up HQ in Paris or Berlin by following suit and introducing a similar tax.

There are lots of small bets there that add up to a line being drawn in the sand that the time for talk is over and if huge revenues are being hoovered up out of our markets then it is time to switch to direct taxation, rather than rely on altruistic reporting and taxing on profit.

There is also a threat there. A 2% levy could easily be raised if the tech giants increase their reliance on accountancy practices that legally move money to other jurisdictions. If they do move a greater proportion, as a form of retaliation, the direct tax could feasibly be raised to strike back. 

The tech giants had been warned for years that this day would come. The feeling I'm getting from the proverbial person in the street is that the move is a popular one.

The ball is now in the court of tech giants and other EU countries. The former could retaliate by moving British jobs overseas, but the tax is pretty low to warrant such a desertion. The EU countries could encourage this potential exodus by not following the UK's lead, but that would run counter to every sentiment that Brussels has expressed regarding tech giants and tax.

My prediction? Everything carries on as usual with a new cost of doing business in the UK being swallowed as the drop in the ocean of multibillion-dollar revenue streams it truly represents. 

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