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In the churn of Conservative chancellors, you could be forgiven for thinking that policies announced under Theresa May’s government were now dead in the water. Sadly, for big tech companies, the prospect of a digital tax soon looms large. But will it make it into the latest budget? And, if it does, how bold will it be?
Let’s recap, shall we? The idea of a new tax on the UK revenues of “digital companies” like search engines, social networks and online marketplaces – also known as the “Digital Services Tax”– was first put forward by Philip Hammond in the 2019 spring statement. At a rate of two per cent of sales, it was always regarded as a sub-optimal tax, but one that ensured that international technology companies would pay at least some tax on revenues – not necessarily profits – they made in Britain.
Is the Digital Services Tax (DST) likely to feature in the UK’s first Budget, this year? That’s a pretty important question for newly-appointed chancellor Rishi Sunak, who will still only be in his first month in post.
On the one hand, the political pressure for some change to the tax regime remains. We continue to see countries arguing that more of the profits made by multinationals should be taxed where the customers are (in the “market jurisdictions”) rather than in the countries that own the intellectual property. Wider change is being discussed within the 137-country group set up by the OECD to consider further global changes – the so-called “Inclusive Framework on Base Erosion and Profit Shifting”. However, changes here will necessarily take time to work through and DSTs are seen by some governments as a stop-gap answer to turn to in the meantime.
But the chancellor is well aware that DSTs are controversial and might have undesirable consequences. After France passed its digital tax in late 2018, the US trade representative argued that these taxes predominantly discriminate against US tech giants, and seem to target only services where US companies are dominant. That is why the US countered France’s plans by threatening the imposition of tariffs on French goods entering the US. That is something that the UK would clearly not want applied to its goods as it embarks on new trade relations after leaving the EU at the end of 2020.
In January, at the World Economic Forum, the “Davos compromise” position was agreed between France and the US, under which no DST would be collected by the French this year and no tariffs would be imposed by the US. This is a temporary fix relying on the outcome of the talks at the Inclusive Framework: Bruno Le Maire, the French minister of Finance, has been clear that if the OECD comes up with an acceptable alternative by the end of 2020, France would use that basis to charge tax rather than the legislated DST. Otherwise, Le Maire underlined, the DST would apply, even if collection has been delayed.
If the original intent of DSTs was stimulating debate and change in the international tax system, that has largely been accomplished. Now, proceeding further and implementing a national digital service tax might well frustrate this progress. A small delay could be countenanced to enable the wheels of global tax reform to turn.
Ironically, the resignation of Sajid Javid provides more scope for compromise. The former chancellor was also in Davos and was asked if he would be pursuing the UK’s DST, due to come into force in April this year. He was clear that this was still government policy and that the threat of retaliation wouldn’t deter the UK from delivering it. It might have been hard for him to backtrack on those fresh declarations – but the new chancellor could distance himself and take a more moderate position.
Much of what we might see in March 11’s Budget depends on what progress can be expected at the “Inclusive Framework” level. The latest update could provide the basis for the UK to defer implementation, secure in the knowledge that there is a second Budget due in autumn. That would “cost” the UK Exchequer the approximately £300m that it had booked for 2020/21, but may be a small price to pay to be able to sit back and watch the developments for another six months.
This is likely to be preferred to the “Davos compromise” of imposing the DST but agreeing to retrospectively accept any tax ultimately agreed by the Inclusive Framework, which would impose greater uncertainty on the businesses. This is going to be the chancellor’s first test of tax diplomacy. But there is much more to come.
Chris Sanger is UK Head of tax policy at accounting firm EY, and former head of business tax policy at HM Treasury. The views expressed are his own and not necessarily those of the above organisations.
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