Every year, Silicon Valley’s enormous firms release their tax audits and every year they are met with an outburst of rage and anger. ‘Scandalous, intolerable and unfair’ were Dame Margaret Hodge’s words used to describe Netflix’s latest corporation tax bill. She also branded Facebook’s 2018 receipts ‘outrageous’ and Google’s ‘obscene’ in 2015. Yet the same culprits seem to get away with paying tax equivalent of just one twentieth of their revenue. However, the Government’s new Digital Services Tax (DST) may bring the end of big-tech outmanoeuvring corporation taxes.
Currently, corporation tax which taxes a multinational on where their headquarters are and how much profit the firm is declaring (many firms, such as Amazon and Apple re-invest profits throughout the year in Research and Development to keep end of year profits low). The updated DST instead charges a firm on where its value is generated – i.e. where its customers are. The DST only applies to firms whose revenue is made from owning social media sites, search engines and online marketplaces. In addition, the firm must generate revenues of over £500 million before 2% levy on cash earned over the £25 million will be applied. Amazon, eBay, Google, Facebook and many others will all be included. A sum of £25million may sound like a generous allowance, but this was just 1.5% of Google’s £1.6billion revenue last year.
It is a big statement from Downing Street and the hard-line approach may well pay dividends. It is estimated to raise over £2 billion for public finances in its first five years and financially holds the world’s largest firms to account. The DST is also harder to avoid than corporation tax and is not unwelcomed by Microsoft’s President Brad Smith or Apple’s CEO Tim Cook, for instance, who have accepted that many Fortune 100 corporations – including themselves – are not paying enough tax. But this does not mean the policy has not had its opposition.
Margaret Hodge argues the DST alone is too pedestrian and has called for stricter fines and punishments for tax avoidance and criticised the government for not including video streaming services in the tax. This would include firms such as Netflix which generates over £1 billion annually from UK subscriptions. There have also been calls to add a packaging tax to target online retailers such as Amazon. The legislation would require large delivery services to declare how much packaging they use in their distribution and apply a ‘sin’ tax on non-recyclable packaging. In increasing tax receipts, it would incentivise firms to invest heavily into finding greener ways to package and distribute their products. Amazon invested $9.325 billion into research and development last year alone. The packaging tax could be utilised by governments to influence corporations’ investments without first reprimanding their cash, although the US Treasury remains sceptical of the motives behind the legislation.
The DST has sparked Robert Lightizer, the US trade representative, to call for an investigation into the discrimination of American firms by this tax. However, an investigation is not needed – the tax’s main purpose is to target California’s tech giants, although this is for their profits and not their nationality. This is not the first time the US have let their feelings on the topic be known. In response to France’s proposed digital tax, Trump threatened to impose retaliatory tariffs worth $2.3billion on French exports. France cited potential trade war as a reason for delaying the tax’s implementation. However, these warnings were made in February, and the US President has seen his approval ratings slide, domestic social and economic pressures mount, all amid the backdrop of a Presidential election later this year. Furthermore, Twitter – another Silicon Valley corporation that would be included in the tax – are not in Trump’s good books following the fact-check fiasco. So, it may be safe to assume that the POTUS has bigger fish to fry and may not be bending over backwards to defend Californian tech firms.
It is not just politicians across the pond that have shown their contempt. Russ Shaw, the founder of Tech Global Advocates, argues that an internationally agreed tax scheme may be a more productive long-term approach. The OECD economic organisation also agree that a multi-lateral effort would cause less tension between its 37 member countries and called on the UK to ‘hold-off’. However, these organisations are forgetting the primary issue: that global tech firms aren’t paying their fair share of tax. And so, the UK has placed a short-term temporary measure until a more co-operative scheme is proposed. The Digital Services Tax shows a Britain diverging from Europe and although the tax may not be financially ground-breaking, it is a much-needed step in tackling the Silicon Valley skivers.