Britain is pressing ahead with plans for a new digital services tax focused on large US technology companies, despite complaints by UK-based groups that they risk being caught by the measure and fears of US retaliation.
The levy, due to take effect in April after inclusion in Wednesday’s Budget, is aimed at securing what critics claim are hundreds of millions of pounds that Silicon Valley companies avoid paying by diverting profits to low-tax territories such as Ireland.
In another strand of the government’s attempts to rein in “Big Tech”, Rishi Sunak, the chancellor, also gave the go-ahead to plans that would increase the power of the UK’s competition regulators, targeting “digital platforms with strategic market power”.
Mr Sunak introduced the 2 per cent tax on revenues generated by UK users of large social networks, search engines and online marketplaces in the Budget.
But British tech companies have complained that the scope of the digital services tax goes well beyond Silicon Valley giants such as Google and Facebook to include UK-based ecommerce groups.
The stakes are high as Britain aims to raise almost £500m a year from the digital services tax: as well as pushback from tech companies, the Trump administration in January threatened to impose tariffs on UK car exports if the Johnson government proceeds with the levy. The spat could complicate Britain’s efforts to forge a post-Brexit trade deal with the US.
Some UK-based tech companies are particularly concerned about the risk of double taxation. This is because EU competition rules, which still apply in the Brexit transition period running until the end of the year, prevent UK companies from offsetting the digital levy against others, such as corporation tax.
“It’s deeply disappointing that we will now have a system where successful, profitable and tax-paying UK tech companies face the prospect of double taxation from a DST that was originally aimed at international tax avoiders,” said Paul Harrison, chief financial officer at Just Eat, the UK-based food-ordering service that is among the British tech companies likely to be most affected. “It is a badly designed policy that will severely undermine the UK tech industry.”
In a concession to their critics the government on Wednesday agreed to consider whether to exempt “marketplace delivery fees”, such as those charged by Just Eat and Deliveroo for ferrying food orders to customers’ doorsteps.
However, Just Eat’s core business, where diners order from traditional takeaway restaurants through its app, will still be hit by the new tax. “That clearly doesn’t go far enough,” Mr Harrison said of the potential delivery fee exemption.
Just Eat commissioned a report last year from the Centre for Economics and Business Research, an economics consultancy, which found the digital services tax will place a “significant burden on UK domestic tech companies”, including £70m in additional taxes in the first year after its introduction and hundreds of millions of pounds more in lost investment thereafter.
The report added the tax would put UK tech companies at a “competitive disadvantage” to overseas competitors.
The measure, which affects companies with annual global revenue of more than £500m and £25m plus of UK sales from relevant activities, is meant to ensure that online transactions such as advertising are taxed where customers or users live.
The UK initiative is just one of many by countries keen to secure more tax from US tech companies.
These unilateral measures come despite efforts to forge a new set of global rules for digital taxation by the OECD, the Paris-based international organisation, by the end of this year.
The Treasury said the UK’s new digital tax will be repealed once a global agreement is in place. “Our strong preference is for an appropriate global solution,” a spokespeSrson said.
The Johnson government has given industry the impression it is eager to take on “big tech”.
“If you go into the Treasury, there is a huge institutional push on this issue,” said one tech industry lobbyist. “One official said to me: ‘To be blunt, you just need to pay more tax’.”
The government on Wednesday signalled it would accept the recommendations of the Furman Review, a report published last year which urged the creation of a new “digital markets unit” to “support greater competition and consumer choice in digital markets”. The government also said it would revisit any UK or EU regulations that might “entrench monopoly behaviours”.
However, the industry argues the digital services tax will harm the competitiveness of high-growth UK companies that the government should be championing.
“What we have here is a problem of international taxation,” said Julian David, chief executive of TechUK, a trade body which represents hundreds of UK and multinational tech companies, including Amazon, eBay, Deliveroo and Uber.
“Trying to fix that at a country level is really unhelpful . . . If you end up . . . with individual systems, British-based companies are going to get caught up in different tax regimes.”
In the UK, online transactions account for more than 20 per cent of all retail sales, say analysts, second only to China among large internet markets.
Several British ecommerce companies have been operating now for two decades or more, including Trainline and Skyscanner in travel, Asos and Boohoo in fashion, and Ocado and Just Eat in food ordering. Newer, fast-growing ventures that operate online marketplaces include Depop in clothing and Deliveroo in food.
Not all UK-based online retailers would be affected by the digital services tax, but those that act as intermediaries in a marketplace, such as Just Eat, Deliveroo and Trainline, are likely to come within its scope.
[Mr David said at its heart, the digital services tax was a vote-winning “populist measure”, rather than a levy that would generate meaningful additional revenues for the Treasury.
Despite the damage to some firms from the digital service tax, other tech industry lobbyists gave a cautious welcome to other measures in the Budget, including a boost to R&D and the threat of tougher regulation for Big Tech.
“The budget delivers a strong signal to innovative British tech start-ups that this Government is for them,” said Dom Hallas, executive director of Coadec, which represents UK tech ventures. “But there’s still lots more to do to really turbocharge the tech scene, and the devil will be in the detail of a number of consultations announced today.”
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