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The option to levy higher taxes on the likes of Google and Facebook has proved a contentious facet of many budgetary agendas in 2018. In the wake of Philip Hammond’s pitch to introduce a digital services tax in the UK, the cost-benefit debate over such a tax has only intensified.

Attempting to quell public anger over the low tax contributions made by international tech giants, the Chancellor proposed a 2% levy on large social media firms and search engines to take effect by April 2020. To avoid stifling smaller tech companies, the tax will be targeted at profitable firms with global revenues of at least £500m. Although the Chancellor’s intent has invited public praise, significant criticism of the proposal has emerged from many key players in the global technology market including, most notably, the US. The debate centres over three primary issues. How legitimate is the criticism in these areas?

Debate 1: Equity Issues

The cornerstone of the disapproval focuses on the equity issues accompanied by such a tax: it would disproportionately affect US tech firms because of their near monopoly over the global digital services market. Kevin Brady, Republican chairman of the US House of Representatives, commented that “singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab.” There are concerns that the US could retaliate with harsher taxes on UK companies – this is especially threatening given the UK’s hopes of a concrete trade deal with the US post-Brexit. Others have highlighted that the US could complain to the World Trade Organisation quoting unfair treatment of successful US companies.

The UK Treasury maintains that the tax “is not targeted at any country and seeks to ensure the tax system is fair”. However, this argument seems unfounded – under the criteria stated, only US tech firms would qualify to pay the tax. Many UK firms including Just Eat and Deliveroo, which are wholly dependent on digital platforms to do business, either have insufficient revenues or profit margins to meet the criteria for the tax.

The US claim of unfair treatment does seem legitimate. However, so too does the public’s call for improved policing of tax contributions by such companies. It has been argued that the proposed levy is a drop in the ocean for highly profitable digital services firms – Labour Deputy Leader Tom Watson commented that “the tech giants do need to pay more in tax, but the measure announced today is pittance for these massive international companies”. It seems the government must move forward with a careful balance of the interests of the UK public and the US tech sphere in mind, ensuring bridges to future trade links are not burned.

Chancellor Philip Hammond’s budget contain plans for a digital services tax.

Debate 2: International Trade Treaties

One key obstacle to implementation of such a tax is that international trade treaties are not compatible with taxes on digital services. To some extent, the problem is definitional. For example, the UK/USA Double Tax Convention emphasises that a company’s profits are only taxable in a foreign state if the firm has a permanent establishment in that state. If digital taxation is incorporated into the trade agreement, the scope of a ‘permanent establishment’ will have to be broadened to accommodate overseas digital enterprise. Following the European Commission’s call for a digital services tax earlier this year, it proposed a common reform to the EU’s corporate tax rules, including establishing criteria for a ‘virtual permanent establishment’ in a country. However, any common reform process will likely be lengthy.

Such compatibility concerns have been echoed by the US via the US National Foreign Trade Council (NFTC). President Rufus Yerxa has claimed that that “The NFTC is concerned that the concept of a Digital Services Tax threatens to undermine the long-held principle of permanent establishment that underpins worldwide taxation policies…and is a cornerstone of the US-UK tax treaty.” Given the issue of equity discussed earlier, the UK is going to have to tread with caution throughout its negotiations to avoid severing trade links with the US over such a contentious issue.

The tax would only apply to the biggest American tech behemoths (Photo: Max Pixel)

Debate 3: Protectionism and Competition

Accusations of government protectionism have also emerged amongst apprehension that the tax could render the UK uncompetitive in tech markets of the future if incentives to do business with the UK fades. The prospects are worsened by continual European stagnation in production and innovation vis-à-vis international giants. As an alternative to taxation, some have called for a government focus on improving workforce technology skills and thus productivity. This is especially important for the UK given the uncertainties surrounding Brexit. Another option is to cooperate more extensively with the OECD to formulate a harmonised digital tax policy. Via this method, the UK would avoid landing themselves a competitive disadvantage. However, any progress on multilateral trade agreements is likely to be slow.

All in all, the premise of the tax does deserve praise: the government is responding to a justified public call for action against tech giants. However, the path to policy implementation must be trodden with care, especially concerning US trade links – the UK cannot afford a weaker relationship with yet another global force. An optimal course of action would be further collaboration with the OECD to work towards a harmonised digital services tax. John Kallmer, Executive Vice President of Policy at the Information Technology Industry Council, echoed this sentiment: “This is a genuinely global challenge…Countries have got to coordinate and develop shared principles.” Multilateral decision-making may take considerable time as even European countries including Czech Republic, Ireland, Sweden and Finland are currently opposed to the policy proposal. However, the implications of UK unilateral action pose threats to trade relationships and the UK’s competitiveness on the global digital services stage – these threats should not be underestimated. If Hammond’s impatience gets the better of him, we could see consequences of magnitude.

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