Chancellor Philip Hammond has just announced the creation of the Digital Services Tax; the government’s latest attempt to more thoroughly tax the likes of Google, Facebook and Amazon. Despite generating billions of pounds worth of revenue in the UK, international tech giants contribute very little to our public finances. So what is the Digital Services Tax and what does it mean for our economy?

What is the Digital Services Tax?

 

The Digital Services Tax is a new, 2% levy on revenues that the so-called ‘tech giants’ make from their UK users, from any of these services: “search engines, social media platforms and online marketplaces”. Functionally, this means like the likes of Google, Facebook, Alibaba and Amazon will have to pay more into the HMRC purse. The tax will come into effect in April 2020 and is expected to raise an additional £400m a year in tax revenue.

A lot of specifics are yet to be nailed down. However, the Chancellor explained that the tax would target established tech giants, and not startups. He also explained that it is not a tax on consumer sales executed via online platforms, but rather on the revenues these companies generate from UK users. Most of these revenues are generated through advertising, and therefore shouldn’t affect consumer prices on websites like Amazon. The tax will also be confined to profitable companies with global sales of more than £500m.

Why do we need it?

 

For a long time governments across the world have struggled to properly tax the international tech business that generate revenues in their countries. Because of their unique business models, their digital nature, and their international span, conventional tax policies has been ineffective at proportionally taxing their in-country activity.

Tech giants, like other large international businesses, also utilise vast and complex tax avoidance systems which leverage their transnational structure to move profits from high corporate tax domains like the UK and the US, to low- or no-corporate tax domains like Jersey or the Cayman Islands.

Google, for instance, paid just £50m in UK tax last year on revenues of £5.7bn. That’s because the company’s UK operations – which are focused on marketing – technically only generated profits of £202.4m. While UK consumers might use Google’s search, mail and productivity tools, the physical and intellectual resources powering them are based in the US, where it pays most of its tax bill. Other tech companies operate in a similar way.

It’s clear that a new taxation framework is needed to make these companies pay, to cite political rhetoric, “their fair share”. In other words, an amount that better reflects the huge revenues they generate in the UK and other sovereign territories. The Digital Services Tax might just do the trick.

Will it work?

 

A lot will depend on the final scope and remit of the tax, which is yet to be codified, ratified and enforced. There’s also the possibility that large tech companies, which have plenty of cash to spend on elite accountants and high-powered legal teams, will find ways to avoid this tax, too. But the early interpretations of Hammond’s snapshot are that the Digital Services Tax will indeed allow HMRC to capture more of their UK-generated cash. As Guardian Tech Journalist Alex Hern suggests, “this is a tax that Amazon wouldn’t have paid in 2014.”

It should be noted the Chancellor made a comparable promise in last year’s budget, announcing “the Google Tax”. Hammond said: “from April 2019, and in accordance with our international obligations, we will apply income tax to royalties relating to UK sales, when those royalties are paid to a low-tax jurisdiction.” We should also remember that governments and international federations have been trying for years to make these nationless companies contribute more to their fiscal coffers. In that vein, the Digital Services Tax could be dropped if the OECD reaches a deal – something that’s been in the pipeline for a while – that the UK government feels is fiscally or politically superior.

Only time will tell whether this new initiative will prove effective in netting more money from tech giants. But something needs to change, and this policy seems like a step in the right direction.