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The government has announced a special “digital services tax” on US technology firms – including Google, Facebook and Amazon – to make sure “these global giants with profitable businesses in the UK pay their fair share”.
Philip Hammond, the chancellor, said the UK could no longer wait for “painfully slow” discussions on an international agreement on tackling tech firms’ tax avoidance. He said the UK would go it alone and introduce the tax on online firms that make more than £500m a year globally. Hammond said he expected the “narrowly targeted tax”, which will come into force in April 2020, to raise more than £400m a year for the exchequer.
However, Office for Budget Responsibility (OBR) forecasts suggest the tax could raise just £30m each from the likes of Facebook, Amazon and Google. The tax will be charged at a rate of 2% and only apply against revenue from search engines, social media platforms and online marketplaces.
“The UK has been leading attempts to deliver international corporate tax reform for the digital age,” Hammond said. “A new global agreement is the best long-term solution. But progress is painfully slow. We cannot simply talk forever. So we will now introduce a UK digital services tax.
“It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.”
It follows mounting anger over the tiny amounts of tax that US technology companies pay in the UK, despite making billions of pounds in sales. Under the current system companies pay tax only on UK profits, and US tech firms have been accused of artificially reducing their profits in order to pay less tax.
Five of the biggest tech firms – Facebook, Google, Apple, Microsoft and the IT company Cisco – deprive the exchequer of £1bn a year, according to research by the campaign group Tax Watch.
Facebook paid £15.8m in UK tax last year despite collecting a record £1.3bn in British sales. Globally, Facebook made $20bn (£15.3bn) of profit on total sales of $40bn last year, meaning it converted half of its sales into profits. However, in the UK 5% of sales were converted into UK-taxable profits. The social media firm paid very little tax in the UK because its profits were reduced by a £444m charge for unexplained “administrative expenses”.
Margaret Hodge, a Labour MP and former chair of the public accounts committee, said it was “absolutely outrageous” how little tax US Facebook paid in the UK.
Hammond said he was “already looking forward to my call from the former leader of the Liberal Democrats”. Sir Nick Clegg, the former Lib Dem leader and deputy prime minister, last week started work as Facebook’s head of global policy and communications.
Clegg’s brief will include explaining to world leaders why Facebook pays so little tax outside of the US. When he was deputy prime minister Clegg spoke out against people and firms who game the international tax system, saying the public are “rightly angered” by a “wealthy elite” who paid “an army of accountants” to avoid tax.
Amazon paid £4.5m in UK tax last year, despite sales of £8.7bn. Google paid £49m on UK 2017 sales of £7.6bn. The auction site eBay paid £1.6m on sales of £1bn, but was later forced to pay an additional £6m after a review by HMRC.
Hammond made clear that the new tax would not be an online sales tax, which “would fall on consumers of those goods – that is not our intention”.
He also sought to reassure the UK’s thriving digital startup community that the tax is not designed to hinder their growth, saying it would be structured to ensure “established tech giants rather than our tech startups shoulder the burden”.
He said the introduction of a digital services tax showed the government was taking action to tackle tax avoidance rather than just “talking tough” like Labour.
Miles Dean, the managing partner of law firm Milestone International Tax, said it “beggars belief” that the government would introduce a new tax on multinationals when the UK requires fresh international investment in a post-Brexit economy.
“At a time when the UK must pull out all the stops to attract inward investment with Brexit looming on the horizon, it beggars belief that a Conservative chancellor should contemplate levying a brand new tax on companies that have already invested heavily in the UK, employ thousands of people and whose total tax contribution is very often overlooked.
“The reality is that Philip Hammond needs to raise revenue somewhere but inventing a digital services tax isn’t the answer. The idea that the UK is prepared ‘to go it alone’ without any international consensus is ridiculous and will undoubtedly lead to a retaliatory response from trading partners, most likely the US.”
Stella Amiss, the head of tax policy at accountants PwC, said: “The confirmation of a new digital services tax was trailed as a step towards levelling the playing field between online retailers and the high street. But it is much more than that. Working out who is taxed and who isn’t in the digital economy is no mean feat when all businesses operate in an increasing technological world.”
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