The government is planning to introduce a new turnover tax on internet giants - tailored almost exclusively for Amazon, eBay, Facebook and Google - that will be introduced in tax year 2020-21.
The Digital Services Tax was introduced by Chancellor Philip Hammond in the Budget on Monday, and is aimed at online companies trading in the UK with turnover of more than £500 million per year.
The tax, levied at two per cent of UK-derived revenues is intended to raise around £400 million from companies operating specifically as search engines, social media platforms, and online marketplaces.
"We will now introduce a UK Digital Services Tax.— HM Treasury (@hmtreasury) 29 October 2018
...It will be carefully designed to ensure it is established tech giants - rather than our tech start-ups - that shoulder the burden of this new tax." #Budget2018 pic.twitter.com/h2hKxMrO1Y
It is aimed, Hammond claimed, at "established tech giants" rather than start-ups. The tax would only apply to profitable companies, but could be abolished if members of the Organisation for Economic Co-operation and Development (OECD) can agree a formula for taxing internet giants.
"The rules have simply not kept pace with changing business models and it's clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business," said Hammond.
He continued: "We will consult on the detail to make sure we get it right, and to ensure that the U.K. continues to be the best place to start and scale-up a tech business."
Hammond announces that the Government "will introduce a UK digital services tax", paid by companies that generate at least £500m in global revenues. Will come into effect in April 2020. Emphasises it is "not an online sales tax", as that would be paid by consumers #Budget2018— Luke Tugby (@LukeTugby) 29 October 2018
The Digital Services Tax meant to show UK "serious" about business tax reform. But exceptions and clarifications suggest govt wants to raise £ only from big unpopular tech firms, leaving consumers & anything popular & tech-related alone. Not sure experts wd call that serious.— Stephanie Flanders (@MyStephanomics) 29 October 2018
However, the government could face a backlash from the US government over a tax that would appear to exclusively target US companies.
"Given the dominance of the US tech giants, it is hard to see the Trump administration taking kindly to the digital sales tax as the UK sets out its stall for the best possible trade deal with the US," Dan Neidle, a tax partner at law firm Clifford Chance told the BBC.
It could also a rethink by US internet giants over their investments in the UK. Google, for example, is currently spending £650 million on a new headquarters in Kings Cross, London, which will house 4,500 employees.
The companies targetted by the tax have yet to issue a formal response to the tax initiative.
A tax on Amazon etc might sound like sticking it to The Man, but Amazon's margins are so wafer-thin it's ultimately customers who will pay— Barry Collins (@bazzacollins) October 29, 2018
It comes after a similar initiative was put forward by France's President Macron as a means helping to make good an expected shortfall in European Union budgets when the UK formally leaves the EU.
At the moment, Macron's proposal for a three per cent levy is being blocked by a number of countries who claim that it would not raise anywhere near enough, and that it could end up costing more to collect than it raises.
However, the initiative did win some plaudits among UK technology companies.
Richard Stables, CEO of price comparison service Kelkoo, described it as "long overdue".
He added: "Google and Amazon have been avoiding tax payments which has given them an unfair edge over the competition [but] online retailers' financial advantage over bricks and mortar competitors is not the reason for the struggle and failure of traditional high street names. That is down to the inability to meet consumer demand for a coherent online strategy and user experience."
The Office for Budget Responsibility (OBR), meanwhile, also issued its analysis of the proposed new tax.
Is the new digital services tax the most bespoke tax ever? Targets "search engines, social media platforms, and online marketplaces," but only those with revenues above £500m who are profitable. Treasury may as well have just said it targets Google, Facebook, and Amazon. #Budget— Oscar Williams-Grut (@OscarWGrut) October 29, 2018
It says that the tax will raise £275 million in its first year. It won't be until the tax year 2022-23 that it will raise the £400 million mentioned by Chancellor Philip Hammond in today's budget, and £440 million the year after, according to the OBR's forecasts.
The tax will apply to all businesses in the activities mentioned by the Chancellor - search engines, social media platforms, and online marketplaces - where those businesses can boast global revenues of £500 million within those activities, and with at least £25 million in revenues "linked to the participation of UK users".
Furthermore, the OBR points out, the first £25 million in revenues in the scope of the tax will not be taxable.
"The measure will also include a safe harbour provision that will allow businesses with very low profit margins to make an alternative calculation of their tax liability," the OBR document points out, although the details of this alternative calculation are not clear at this moment.
The expected sum to be raised from the tax has been calculated, the OBR adds, by collecting data on revenues generated in recent years by companies that will fall under the scope of the tax, and projecting forward.
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