The UK is going after Facebook and Google with a digital services tax

Taxing consequences.
Taxing consequences.
Image: Reusters/Dado Ruvic
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British chancellor Philip Hammond announced today (Oct. 29) that the UK will impose a digital services tax on the domestic revenue of the “established tech giants,” most likely targeting companies like Facebook, Google, and Amazon.

“It is only right these global giants pay their fair share,” Hammond said during his annual speech outlining the UK government’s budget and fiscal outlook, the last budget before the UK exits the European Union in March 2019. “It’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business,” Hammond added. He warned earlier this month that the UK might go it alone on a digital-services tax as talks on an international agreement were held up by the US.

Europe’s view of America’s technology hegemony has darkened in recent years. While Silicon Valley’s companies have bestrode the globe, claiming billions of users and even higher valuations, Europe’s startup bench remains anemic. Except for SAP and Spotify (paywall), few of the continent’s tech companies are even pushing $30 billion valuations. With Facebook, Amazon, Apple, and Alphabet leading the way, America’s tech giants are now flirting with $1 trillion valuations and vacuuming up the global economy. Not surprisingly, they continue to run afoul of EU regulators over privacy, competition, and taxes.

The EU fined Google a record €4.34 billion ($5.04 billion) this year for using its Android operating system to favor its own apps, services, and search engine. In 2016, Apple was forced by the EU to fork over $16 billion in back taxes to Ireland. The EU’s General Data Protection Regulation, enacted in May 2018, consumed “hundreds of years of human time” for Alphabet and others to comply with a provision targeting the tech giants that allows regulators to impose fines of up to 2% of the prior year’s global revenue. In September, the EU’s competition commissioner, Margrethe Vestager, said a preliminary investigation had been opened into possible antitrust violations by Amazon.

Of course, Silicon Valley sees this reaction as sour grapes by EU’s regulators. As long as they can’t have hometown tech heroes, they’ll tax and regulate those in the US, the thinking goes. At last year’s NewCo Shift conference in San Francisco, the sentiment among venture capitalists on stage was that Europe had failed to create a technology sector, and was taking it out on American players. One investor (rules of the conference prevent identifying individuals) said Europe should stop trying to dictate policy for US startups until it cultivated tech giants of its own.

The UK tax, charged at 2%, will be implemented from April 2020. According to forecasts from the Office for Budget Responsibility (OBR), the new tax will bring in £300 million ($384 million) in its first fiscal year and £400 million in the following two years. Hammond joked that he was looking forward to a call from the former deputy prime minister and leader of the Liberal Democrats, Nick Clegg, who was recently hired by Facebook as head of its global affairs and communications team.

The UK’s announcement steals a march on a similar proposal currently in the works for the EU (of which the UK is a member for another few months). By the end of the year, the EU may announce a 3% levy on big tech group’s local revenue, with a key debate taking place among member states next week. US leaders criticized the EU plan as discriminatory against US companies, and the UK plan will surely get a similar reception.

The tax is designed to hit large global corporations and not smaller tech start ups. Hammond said the tax would only be paid by profitable companies with more than £500 million in annual global revenue. Targeted services include social media platforms, search engines, online marketplaces, and collaborative sharing platforms. “These businesses typically generate revenue from the provision of targeted online advertising, the commission charged for facilitating transactions or the subscription fees charged for access to the services they offer,” the OBR said.

Digital platforms have infamously paid little tax in the UK in recent years. Last year, Facebook said it paid £15.8 million in tax in the UK, but reduced this bill by claiming tax credits from granting its employees shares in the company, meaning its net tax bill was just £7.4 million, or less than 1% of its UK revenue. One of Amazon’s UK units paid just £1.7 million in tax on a profit of £72 million last year, while Google paid nearly £50 million on UK profit of £202 million.

Hammond said the UK tax will only be imposed until a long-term international solution is implemented. The OECD hopes an agreement on cross-border tax can be reached within two years, but there are still many points of disagreement (pdf) among countries, despite discussions spanning nearly half a decade.