The UK government has announced a new “digital services” tax of two percent that it plans to start levying on the UK revenues of tech giants like Amazon, Google and Apple based on the money they make on digital services like advertising and streaming entertainment (but not online sales).
Announced as part of the 2018 Budget by UK Chancellor of the Exchequer Philip Hammond, the tax is due to come into effect in April 2020. Hammond said that the government expects to raise more than £400 million ($512 million) annually based on current revenues.
“The rules of the game must evolve now if they are to keep up with the digital economy,” Hammond said in Parliament today. “Digital platforms delivering search engines, social media and online marketplaces have changed our lives, our society and our economy, mostly for the better. [But] they also pose a real challenge for the sustainability and fairness for our tax system… the rules have not kept pace.
“The UK has been leading attempts for international corporate tax reform.. but progress is painfully slow,” he continued. “We cannot talk forever so we will now introduce a UK digital services tax.” You can see an excerpt of the speech here.
He went on to say that the tax is “narrowly targeted” on specific models. “This is not an online sales tax on goods ordered over the internet,” he said, saying that such a tax would end up getting passed down to users. The digital services tax will be paid by companies that are profitable, he said, and making at least £500 million ($640 million) per year in global revenues.
To be clear, the UK government expects large companies, and not startups, to “shoulder the burden” of the tax, the Treasury noted.
The tax would represent a shift in how these companies are taxed today: up to now, taxes have been calculated on profits, but that is problematic because of how companies report profits, and in many cases they are not recorded in the UK, even if the purchases of digital services are in the UK.
At the same time, companies like Amazon and Apple are some of the biggest in the world and have grown tremendously in recent years, as people rush to purchasing products from them online.
It also lays out an interesting landscape for how the UK plans to raise money in a post-Brexit country after it leaves the European Union and the wider tax code that exists around it. However, Hammond also noted that the UK is currently working with the G20 and the OECD also to consider how best to tax digital companies, and if those talks reach an agreement, the UK might consider that instead of its own plans. “This shows we are serious about this reform,” he said. “It is only right that these global giants pay their fair share.”
However, many are already already criticising the tax as too low, describing only £400 million and two percent as almost nothing to these companies, which are some of the most profitable and wealthiest in the world, with Amazon and Apple the first two companies to ever reach trillion dollar market caps.
More pragmatically, a UK tax has been talked about for years already, so this is just the start of how this might develop.