IT WAS ONE of the best-trailed announcements in the budget. But when Philip Hammond, the chancellor, laid out his plans for a “digital-services tax” he was careful to name no names. Instead he said the tax—which will be levied at 2%, on revenues rather than profits, from April 2020—would apply to search engines, social networks and marketplaces, and specifically to those that are already profitable and which generate over £500m ($640m) in annual revenue around the world.
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It does not take a tax lawyer to work out that he had in mind firms such as Google, Facebook and Amazon. They are attractive targets. Their data-breaches, dissemination of “fake news” and tax avoidance means that the reputation of the internet giants has never been lower.
The tax’s impact on the public finances will be modest. Mr Hammond predicted it would raise £400m a year by 2022, out of a total tax take forecast to be about £900bn. As one MP pointed out, Sainsbury’s, a big supermarket, pays more than £500m in business rates by itself. But the idea is more interesting than the revenue, for it makes Britain the latest country to promise unilateral action in an area that many governments are arguing over.
International tax arrangements are complicated, but a fundamental principle is that companies are taxed in the countries where value is created, says Dan Neidle, a tax specialist at Clifford Chance, a law firm. On that basis it makes sense that Britain recoups little tax on the profits of companies like Google and Facebook, which have most of their programmers, and their headquarters, in America.
Britain’s government argues that digital firms are different, because much of their income is generated not by programmers in beanbag-filled Silicon Valley offices, but by users all over the world. It is they who, by uploading pictures and sending emails, produce the valuable data on which the computing giants’ business models rely.
Tax campaigners have long pointed out that many internet giants pay taxes that seem puny compared with how much business they do in a particular country. The European Commission reckons that big computing firms pay an average tax rate of 9.5% in Europe, compared with the 23.3% paid by other companies.
The OECD, a rich-country club, has been pondering how to reform international tax agreements in light of such questions for several years. Mr Hammond is not the only one who has run out of patience. A week before the budget, Spain floated plans for a similar levy. In March the European Commission proposed its own plan. There may be a first-mover advantage in passing new laws. That has been the experience of the European Union with the General Data Protection Regulation, a privacy law that came into force in May. The GDPR was bitterly opposed by the computing industry, but has since been copied by other jurisdictions.
Britain’s tech tax is not without risks. Singling out particular business models is one, says Mr Neidle: “Artificial distinctions like that create uncertainties and more opportunities for avoidance.” Economists dislike taxing revenues rather than profits. America, with which Britain hopes to sign a trade deal after Brexit, may see the levy as an attack on some of its most valuable firms. Mr Hammond has said that, if an international tax deal is done before 2020, he will consider abandoning the levy. But the tax code is littered with temporary measures that somehow never went away.