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By Paul Hannon, Timothy W. Martin and Sam Schechner 

LONDON -- The U.K. government said it would move ahead with plans to introduce a new tax targeting revenue generated locally by large tech firms, setting the country on a path to become the first developed country to roll out such a "digital" tax.

The new tax is still subject to final rule making and won't start until 2020. Still, it comes as dozens of other countries are contemplating new levies on digital services sold by companies such as Alphabet Inc.'s Google and Facebook Inc. These governments are hoping to capture more revenue from digital services as economic activity increasingly shifts online.

The U.K. treasury chief, Philip Hammond, said Monday the tax would only target large, profitable companies, with global revenues of at least GBP500 million ($640 million.) The new levy would target 2% of such a company's revenue in the U.K. Mr. Hammond said it could eventually raise some GBP400 million annually.

The tax would be levied on activities linked to U.K.-based usage of services like search engines, social media platforms and online marketplaces. The tax was one of a series of fiscal measures disclosed as part of the government's annual budget.

The Office for Budget Responsibility, the U.K.'s fiscal watchdog, said that the Treasury's estimate of how much tax the new levy will raise is highly uncertain. Among the questions as yet unanswered about the new tax's structure are whether it will be deductible against corporation tax, for instance. The watchdog also flagged a range of ways the new levy could affect corporate behavior as companies seek to minimize any liability, such as by reclassifying revenue as income not covered by the tax.

Still, the OBR said it is also possible the digital-services tax could prove a bigger money-spinner for the Treasury than its preliminary estimates suggest, given that online activity accounts for a growing share of the overall economy.

For giants like Alphabet, Amazon.com Inc. and Facebook, the U.K. tax would amount to a relatively small sum of additional tax. But it represents the first concrete step among several governments globally to increase the tax burden of these and other large, global tech-services companies.

The effort comes amid a yearslong backlash among governments, particularly in Europe, against companies that critics say aren't paying their fair share of taxes.

Opponents of digital taxes, which include lobbyists for multinationals and countries with large amounts of exports, say a patchwork of new rules that vary by country will hurt smaller companies. They say the initiatives could lead to double taxation of corporate profits, which will stifle international trade and discourage investment.

The tech industry opposes the proposals. On Monday, after the U.K. announced its planned tax, the Information Technology Industry Council, a Washington, D.C.-based lobby group that represents tech companies including Google and Facebook said that "imposing a digital tax could create a chilling effect on investment in the U.K. and hinder businesses of all sizes from creating jobs."

Amazon and Alphabet declined to comment on the new tax. Facebook and Apple didn't immediately respond to requests for comment. All four companies have said in the past, amid criticism of their tax practices, that they pay their fair share.

The U.K. first said it had justification for a new tax in November 2017, arguing users of digital services help make the product that tech companies sell to advertisers and other customers. That principle has influenced the rest of the European Union, which is working on its own tax proposal.

Since launching a broad effort to overhaul the system for taxing companies that operate internationally in 2013, developed-country governments have been divided on whether to introduce new levies that specifically target digital companies or to treat digitization of the economy as a process that requires a more broad-based response. The Organization for Economic Cooperation and Development, which oversees international tax negotiations, hopes a compromise can be reached by 2020.

Mr. Hammond said that while a global agreement "is the best long-term solution," progress has been "painfully slow." The U.K. said its new tax would only be in force until a global solution is found, but Mr. Hammond said "we cannot simply talk forever."

Inspired by European Union proposals to impose a tax based on the revenue of tech companies rather than their profit, South Korea, India and at least seven other Asian-Pacific countries are exploring new taxes. Mexico, Chile and other Latin American countries too are contemplating new taxes aimed at boosting receipts from foreign tech firms.

Such taxes, which are separate from the corporate income taxes many companies already pay, are broadly known as digital taxes and could add billions of dollars to companies' tax bills. They seek to impose levies on digital services sold by global companies in a given country from units based outside that country. In some cases, the proposed taxes target services involving the collection of data about local residents, such as targeted online advertising.

Europe is the largest overseas market for many tech companies, and the EU estimates that its proposal would bring in about EUR5 billion ($5.7 billion) annually. But digital taxes could eventually take a bigger bite in Asia, where growth is faster and there are many more internet users.

At the heart of the debate is the question of where tech giants should pay their taxes.

Under international tax principles, income is taxed where value is created. For tech companies, that isn't always clear. Services including advertising and taxi reservations are now often delivered digitally from halfway around the world, by companies that pay little income tax locally.

U.S. tech companies often report little profit, and therefore pay little income tax, in the overseas countries where they sell their digital services. That is because customers in those countries are actually buying from a unit based elsewhere, often a low-tax country. The in-country unit is tasked with marketing and support, and the overseas unit that actually makes sales reimburses the local unit for expenses, leaving little taxable profit.

Under growing political pressure, some tech companies, including Amazon.com., Facebook and Google, have recently started declaring more revenue in countries where they do business. But they also declare more expenses locally, which could offset much of that additional revenue.

The U.K. tax and the other global proposals put pressure on countries with large economies -- including the U.S., which last year imposed a new minimum tax on U.S. multinationals' overseas profits -- to arrive at an agreement about how to tax the digital economy. The OECD has been leading international talks with the goal of reaching a consensus by 2020.

Pascal Saint-Amans, the head of the group's tax-policy center, said the proposals create an incentive to move more quickly. "We understand there has been some frustration, and there is a political urgency," he said. "We cannot ignore it."

On Thursday, Treasury Secretary Steven Mnuchin expressed concern over "unilateral and unfair" tax proposals aimed at U.S. tech companies and urged his overseas counterparts to work within the OECD on a global plan.

Write to Paul Hannon at paul.hannon@wsj.com, Timothy W. Martin at timothy.martin@wsj.com and Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

October 29, 2018 15:02 ET (19:02 GMT)

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