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Does the digital services tax idea add up?

An idea that emerged at the recent Conservative Party conference has sparked some thoughts from Billy MacInnes

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Hands up anyone who thinks the UK government will go ahead with its plans to implement a digital services tax on its own?

Let me remind you what that tax is. It was given prominence on 1 October 2018 when Chancellor of the Exchequer, Philip Hammond, made his speech to the Conservative Party Conference. It’s understandable if you missed it with all the universal celebration accompanying Prime Minister Theresa May’s announcement that austerity is over (and the excitement over her dancing entrance). As an aside, this is the second time the PM has featured in headlines signalling the end of austerity, as she did the same thing in June last year.

Anyway, in his speech, Hammond made some pertinent points about the growing influence of global tech giants and digital platforms, comparing them to the “near-monopoly of Standard Oil and the railroad cartels” in the late 19th century which “led to the introduction of the world’s first monopolies legislation”.

He said that their growing influence “raises new questions about whether too much power is being concentrated in too few global technology businesses”, announcing that he had set up an expert panel to review the UK’s competition regime “to ensure it is fit for the digital era”.

Hammond said the UK was “insisting that the global internet giants must contribute fairly to funding our public services”.

In his speech, Hammond stated “the time for talking is coming to an end and the stalling has to stop”. Most dramatically of all he added: “If we cannot reach agreement, the UK will go it alone with a digital services tax of its own.”

This signals a break from the traditional UK government argument over taxing large-scale international companies, such as banks and companies in the financial sector, that the only way to achieve that goal is through international agreements.

In any case, the UK’s stance on those international agreements has tended to be fluid. Back in 2011, the UK and Ireland were the only countries to oppose a measure from the EU to introduce a common consolidated corporate tax base (in other words, an international agreement on how to tax international businesses operating in the EU by harmonising tax rates).

And when the EU proposed to go ahead with a transaction tax on financial transactions after the G20 failed to agree on the issue, the UK was the most prominent critic, threatening to veto the implementation of the proposal, unless it was agreed globally.

So why Hammond should be so keen to introduce a unilateral tax measure when successive UK governments have been such vocal advocates for multilaterally agreed tax regimes is something of a mystery.

As is its enthusiasm for this measure when UK governments have allowed the financial sector to exploit the international tax system to move funds in the most “tax-efficient” manner and minimise tax rates owed in particular jurisdictions. As a recent article in The Guardian argued, the damage done to the UK by the financial sector could be equivalent to £170,000 per household . And yet just days before Hammond was talking tough on the tech giants, his prime minister was promising that post-Brexit UK would offer the lowest corporation tax rates in the G20.

She told an audience in New York: “You will access service industries and a financial centre in London that are the envy of the world, the best universities, strong institutions, a sound approach to public finance and a consistent and dependable approach to high standards but intelligent regulation.’’

Hammond’s condemnation of the tax practices of the tech giants is not without substance. For example, Amazon’s most recent UK tax bill declined by nearly 38% to £4.6m even though profits had tripled to £80m on turnover of almost £2bn. Last year, Google had a tax bill of £49.3m on UK profits of £202.4m and revenues of close to £5.7bn. In 2017, Facebook’s tax bill was £2.58m after deductibles on revenues of £842.4m.

But his arguments are undermined by the fact that those tax practices are not confined to technology companies. And it doesn’t help his new found zeal for tax measures against tech companies that a previous conservative Chancellor of the Exchequer, George Osborne, negotiated a widely criticised tax deal with Google in 2016 to pay £130m in back taxes to cover a decade of trade in the UK.

At the time, Richard Murphy, director of the campaign group Tax Research, told The Guardian that the “extraordinary” deal did not represent value for the British taxpayer. “We are claiming back a tiny extra proportion [of what Google has underpaid], way short of any reasonable amount of tax,” he said. “It looks as though Google has got a great deal, it must be laughing all the way to its Bermudan bank.”

Given this heritage in taxing (or failing to tax) multinational businesses, it’s hard to see how we can realistically expect the UK government to follow through on threats made in a speech to a party conference to introduce and implement a unilateral measure against the tech giants. This is especially true if, as May’s speech illustrates, after leaving the EU the UK promotes itself as a low tax centre in a bid to try and mitigate the effects of that departure. As the old saying goes, “Money talks, bullshit walks,” and whether that money is physical or digital, it’s still true today.

This was last published in October 2018

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