Hammond’s digital services tax puts UK competitiveness at risk
The government has long been scratching its head for ways to address the current tax treatment of global tech platforms.
Our tax code – all 10m words of it – has been struggling to keep up and adapt to a new economy that is being driven by technology, innovation, and digitalisation.
On Monday, Philip Hammond announced what he believes is the answer to the tech titans tax problem, with a measure that goes further than most tax regimes around the world: a new digital services tax which takes two per cent of UK revenues from profitable tech platforms generating a global turnover of more than £500m.
Many will be pleased to see “fiscal Phil” taking action. There has been public outrage at the lack of corporate tax paid by global giants in the UK for years.
But in many ways this new digital tax looks like a knee-jerk reaction – it may appeal to voters here, but it fails to respect how global tech is a force for good, not least in how these firms support, invest, and spin off many great businesses in the UK.
First, although it might be a popular measure for some, the tax is in fact forecast to raise very little for the Treasury – just £0.5bn in tax revenues when fully operational. When you compare it to total corporation tax receipts (£66bn), it really is miniscule.
This comes at the cost of risking the UK’s future global competitiveness, if “going it alone” and taking unilateral action prompts companies to think twice about doing business in Britain.
Hammond promised his tax would be carefully designed to ensure that only the biggest corporates are impacted, but that could still have a significant impact on jobs, trade, and ultimately tax receipts.
Like them or loathe them, the likes of Facebook, Google and Alibaba create and develop some of the UK’s top talent – talent that the UK cannot afford to lose, now or in the future.
Then there’s the message this sends out to the world. As Brexit uncertainty persists amid rumours of investment decisions being put on hold, are we scaring away global companies at exactly the time we need them most?
Some are already talking about the potential backlash from the US, which could use similar taxes on UK businesses to greater effect.
And even without a governmental response, serious consideration should be given to the global tech giants’ threats to alter their strategy following Brexit. With a new tax thrown into the mix, we do not yet know how they will respond.
Finally, on a practical level, a digital services tax may well be difficult to implement, and would add another layer of complexity to our already unruly tax code.
None of us has a crystal ball, but before we get either too excited or too critical, there are two things we should be clear about.
First, the digital services tax will only come into effect in 2020 if a global agreement cannot be made with the OECD and G20 by then, and second, even if it does come into force, it would only be a temporary measure until such a global agreement were implemented.
Personally, I hope that a global agreement is forthcoming before 2020. I want a global action plan, whether or not it includes a digital services tax, to supersede Hammond’s domestic proposals. If we are all in this together – bringing in the same rules at the same time – no one country can be disadvantaged over another.
The UK has been pivotal in international negotiations to create a new global tax framework. We should continue to cooperate with the OECD to design and implement the lowest, simplest, and flattest possible corporate tax system that addresses the issues and finds a solution that works for the long term.
Anything else runs the risk of jeopardising the UK’s international competitiveness, at the time when we most need to prove our credentials as global Britain.