By Paul Hannon and Nina Trentmann
LONDON -- The U.K. said it will move ahead with plans to
introduce a first-of-its-kind tax on locally generated revenue by
large technology firms -- the most concrete attempt yet by an
industrialized nation to rewrite the world's tax code for the
digital era.
The new tax comes as dozens of other countries are contemplating
similar 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 such services as economic
activity increasingly shifts online.
At issue is how governments collect taxes from the handful of
tech firms, many based in the U.S., that have morphed into global,
digital consumer-services giants. As they have grown, governments
outside their home jurisdictions have struggled with the digital
nature of their wares in coming up with an appropriate level of
local tax to levy.
Big American tech firms have been criticized for reporting
relatively little of their profit in local jurisdictions, opening
them up to scrutiny. An international effort among rich nations to
help standardize how and where to tax these digital services has
been progressing slowly. The U.K. on Monday said it could no longer
wait. As part of its annual budget, it said it was moving ahead
with a plan to begin a digital tax for large tech firms by
2020.
The government of Spain proposed a similar digital-services tax
this month, but that measure requires parliamentary approval.
The new U.K. tax puts pressure on big countries, including the
U.S., to speed up the global effort. The Organization for Economic
Cooperation and Development, a forum of wealthy countries, has been
leading the international digital-tax talks.
Opponents of digital taxes, which include lobbyists for
multinationals, say a patchwork of new rules that vary by country
will hurt smaller firms. They say the initiatives could lead to
double taxation of corporate profit that will stifle international
trade and discourage investment.
The tech industry opposes the proposals. On Monday, after the
U.K. announced its plan, the Information Technology Industry
Council, a Washington, D.C.-based lobby group that represents tech
firms 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."
The U.K.'s Treasury chief, Philip Hammond, said on Monday that
the tax would only target large, profitable companies, with global
revenue of at least GBP500 million ($641 million). The new levy
would constitute 2% of such a company's revenue in the U.K. Mr.
Hammond said it could eventually raise some GBP400 million
annually.
The proposal would affect businesses generating U.K. revenue
from services including search engines, social-media platforms and
online marketplaces. That makes the ad-selling businesses of Google
and Facebook particularly vulnerable. The tax wouldn't impact sales
of digital music or movies.
For giants like Alphabet, Amazon.com Inc. and Facebook, the U.K.
tax would amount to a relatively small amount 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.
"It's clearly not sustainable, or fair, that digital-platform
businesses generate substantial value in the U.K. without paying
tax here," Mr. Hammond said on Monday. He 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."
Big U.S. tech firms have been subject to intense scrutiny here
for how much tax they pay. Amazon U.K. Services Ltd., one of online
retailer's major British units, in 2017 reported revenue of GBP1.98
billion and a profit on ordinary activities before taxation of
GBP72.37 million, but paid only GBP1.7 million in U.K. taxes,
according to Companies House, a register of corporate
information.
Facebook's British subsidiary that year reported revenue of
GBP1.26 billion and a profit of GBP62.76 million in 2017, paying
GBP17.19 million in taxes. Google UK Ltd. for the year ended June
31, 2017, booked revenue of GBP1.26 billion and profit on ordinary
activities of GBP200.55 million. It paid GBP47.36 million in
British taxes.
Spokespeople for Amazon, Facebook and Alphabet had no immediate
comment on the new tax. Amid criticism of their tax practices, all
three companies have said they pay their fair share.
Critics here also said the British government's move may result
in retaliatory taxes in the U.S. They also said tech companies may
simply pass the tax onto its customers.
The U.S. Treasury didn't immediately comment on the new tax.
"This proposal could disproportionately affect American
companies and may ultimately wind up interfering with the U.K.'s
trade commitments," said Rufus Yerxa, president of the U.S.
National Foreign Trade Council. "If enacted, this measure could
also complicate the United Kingdom's push for deeper U.S.-U.K.
trade relations."
Some smaller British-based tech businesses, however, welcomed
the proposal as a way to become more competitive against Silicon
Valley giants.
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.
Inspired by separate 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.
The U.K. effort underscores the complexity of such a tax. The
Office for Budget Responsibility, the U.K.'s fiscal watchdog, said
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 in an effort to
minimize any liability, such as 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-generator for the Treasury than its
preliminary estimates suggest, given that online activity accounts
for a growing share of the overall economy.
--Stu Woo contributed to this article.
Write to Paul Hannon at paul.hannon@wsj.com and Nina Trentmann
at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
October 29, 2018 18:38 ET (22:38 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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