The UK government announced a drastic change to the way Silicon Valley tech giants such as Facebook, Amazon, and Google will be taxed in the UK.
Chancellor Philip Hammond said the UK would tax 2% of the revenue that tech giants make from UK users, in what he said would raise up to £400 million ($512 million) a year for the nation’s coffers from 2020.
The so-called “Digital Services Tax” is a radical move. It’s the first time the UK has specifically taken action on the US tech giants and the low amount of tax they pay in the UK.
Most of the major US tech firms have a complex tax setup that involves routing their sales through a subsidiary located in a low-tax country, such as Ireland. Their UK subsidiaries report revenue based on services provided to the parent company, resulting in drastically lower revenue and profit and, therefore, corporation tax.
“The digital platforms delivering search engines, social media, and online marketplaces have changed our lives… mostly for the better,” Hammond said in his Budget statement in Parliament on Monday.
“But they also pose a real challenge for the sustainability and fairness of our tax system. The rules have not kept pace with changing business models, and it is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax.”
The tax, Hammond added, was aimed squarely at big US tech firms and may also affect Uber and Airbnb. He said the UK would avoid entrapping smaller startups in the new law by only targeting profitable companies generating £500 million in global revenue.
British chancellor: “We cannot simply talk forever.”
Hammond did not go into further detail about how the digital services tax would work, but said the government plans to open a consultation before it introduces the tax in April 2020.
It puts Britain a step ahead of the US and EU on taxing big tech. The UK government said it is committed to ongoing talks among the G20 and OECD to reform the way tech firms are taxed, and will only apply the Digital Services Tax until an “appropriate long-term solution is in place.”
Hammond explained: “New global agreement is the best long-term solution but progress is painfully slow. We cannot simply talk forever.”
Hammond did joke that he expected to hear from Facebook’s new communications chief. Former deputy prime minister and Liberal Democrat leader Nick Clegg is one week into his new job as Facebook’s VP of global affairs and communications.
“I am looking forward to my call from the former leader of the Liberal Democrats,” Hammond quipped.
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