UK Digital Services Tax raises £800M from global tech giants The UK government collected just £800 million in Digital Services Tax (DST) from companies such as Amazon, Google, Meta, eBay, and TikTok in the most recent tax year. Introduced in 2020, the tax is designed to apply to multinational enterprises with revenue derived from the provision of a social media service, a search engine …
For one, big companies or their advisors can take the minister or bigwigs at the Treasury and HMRC out for a pie and chips at the races/football/opera etc.
And don't forget the Treasury and HMRC consult/commission the same advisors when formulating policy, when the advisers will advocate on behalf of the interests of their corporate and high net worth clients. The advisors' bread is buttered on both sides
France has a 3% digital services tax, I believe, targeting tech companies with global revenues exceeding €750 million and French revenues over €25 million per annum.
Since a country is the very epitome of a "walled garden" (for tax at least) what's to stop the government raising the tax rate to 20%?
That 8 billion quid would do very nicely to fill up the Chancellor's budget deficit and with a few pennies left over to feed children in poverty.
A stand-off between two monopolists (say, Google with search, and the UK with its monopoly on ... UK searchers) would be fun to see.
Because the DST is a revenue tax. So it's on total revenue, not profits. If you were operating on a 4% profit margin, then a 2% DST effectively amounts to 50% of your profits (rather higher than the UK Corporation Tax bands of 19-25%). Now I doubt Amazon's margins are as razor-thin as 4%, but that 2% of UK revenue is going to be a much larger percentage of their UK profits.
Of course they'll calculate DST as an expense, reducing the taxable profits, so HMRC loses a bit of CT, but on balance wins.
The concept of a revenue tax is pretty controversial because you could be taxing unprofitable companies as well (e.g. startups, or companies doing high levels of R&D/investment), which is why this is quite specifically on firms generating over half a billion in global revenue and at least £25m from UK users - we can presume they're profitable at that scale (and if they're not, then that's very much their problem, we're not crushing small-scale domestic innovation).
The DST was necessary because all these firms were reporting huge revenues but contriving to declare improbably low profits from that enormous turnover, thereby avoiding Corp Tax. We've also seen in this week's budget a move to cut business rates on hospitality businesses (i.e. local, physical premises - pubs, restaurants, entertainment, etc) whilst increasing rates on big-box warehouses which employ relatively few people per sq.m and are disproportionately owned/operated by the sorts of multi-nationals who prefer to pick and choose where and how much tax they will pay.
But you can't run a 20% revenue tax. Even the likes of Google are unlikely to be have profit margins significantly in excess of 20%. We could probably push to a French 3% or maybe even 4% pretty safely though.
"Even the likes of Google are unlikely to be have profit margins significantly in excess of 20%. "
Remember it's the digital services element that is in question. Taking Netflix as a clear example of a content streamer, their net margin after taxes, interest and all business costs was 22% for the last full year. Meta had net margins as a social media platform of about 37%. I'm guessing the digital services margins for Google would be somewhere between those figures.
Taking Netflix as a clear example of a content streamer
1. You can't cherry-pick one streamer from a system that covers streamers, social platforms, online marketplaces and search.
2. If Netflix had net margin of 22%, then a 20% revenue tax is roughly equivalent to a Corporation Tax rate of 90%. Likewise with Meta having a 37% margin, you're eating >50% of their profits. And it's not like I have any love for Meta, but that's clearly a substantial divergence from our CT regime of 19-22%, given this is only supposed to be making up some of the difference in lost CT! If 22% of profits is what we consider to be fair, then lifting 90% of those profits is divergent from that principle. Of course maybe we think CT should be >50%.
3. If we're going to cherry-pick examples, eBay's profit margin last year was 19% (down from 27% in 2023). So a 20% tax on revenue would have claimed 80% of their profit in 2023 and run them into a loss in 2024. Taxes shouldn't force businesses into the red. Okay, there may be cases where mismanaged businesses can't make rates payments - but they're likely going bust anyway. Presuming that a business has an underlying profit margin in excess of 20% is a huge assumption. The problem we've had is multinationals choosing to declare their profits in different jurisdictions to the ones where the profit was earned. But the solution to that is not to run them into a genuinely loss-making position.
The most important part here is what Paul Monaghan (The Fair Tax Foundation) said - the DST is "clumsy but needed." The expectation is that DST is a stopgap which needs replacing with more cohesive international rules/tax regimes.
Based on these figures we've bandied around, then yes, maybe we could run DST to 10% rather than 2-4%. But 20% on revenue is a huge chunk.
I hear you over revenue tax but it's the only way to stop these "disruptors" from exporting their profits through spurious offshore costs.
Example: Hollywood is more evil than Darth Vader. I think I have mentioned that the late David Prowse received nothing from the re-release of the original Star Wars trilogy [1]. His contract which covered his work in the original shooting was for a percentage of the net profits, not the gross.
1. Other stories maintain that it was the original RotJ that denied profitability, in which case Prowse took several decades to burn his Lucasfilm boats.
It's the only way if you don't look at what other ways might work. The problem is that, although it's harder to get out of than the profit tax, you still have many of the loopholes they used in the first place and it's quite easy to overdo. In this case, for example, they've effectively named specific companies that fall into the tax by setting specific categories and revenue sizes, making it very easy for companies to do the same thing as the recognizable big tech but not pay the tax because they're a slightly different kind of tech or just a bit smaller. Sometimes, the problem is difficult enough that it's worth trying to solve it thoroughly, in this case by figuring out how digital services should be taxed when they involve work from multiple countries. As we've all seen, there's nothing more permanent than a temporary patch, so I'm not expecting them to try, but the results could be better.
so I'm not expecting them to try, but the results could be better.
doublelayer,
What you're asking for here is a wholesale re-arrangement of international corporate taxation, that's going to require agreement from the governments of the EU (both as individual countries and probably at Commission level too), the USA (under Trump no less), Canada, China, Japan, Brazil, South Africa, Israel, India, Australia and a bunch of other countries with decent sized economies. Good luck with that! Seeing as hell is likely to require gritting and snowploughs first, I think a temporary measure is the most likely solution.
While the wholesale version would produce the best results, it would indeed be as difficult as you describe, which is why I did not say that was the only other option. There are many things that countries can do on their own. Each country's tax laws define what is untaxable because it's considered outside of their country, and any of them can change that unilaterally. You have to be careful when doing that because, if they do it wrong, a lot of things can break, but it is within the power of each country's legislators. Some countries also have tax treaties and they would need to figure out how this worked with those. Nor am I recommending something that's never been used before; lots of these inconsistencies already exist. For example, if you live in a different country from that of your citizenship, you likely aren't paying income taxes to your country of citizenship. Unless you're a US citizen, in which case you probably have to, because US tax law is different from a lot of other countries' tax laws on that particular case because they consider something taxable when others choose not to. Countries often make things taxable when others haven't, and that is not prevented by the lack of a global agreement.
This is more difficult, certainly much more so than setting a simple integer percent of revenue on a group of companies. Given the ways the simple method can fail to include something they should, the risks of turning that integer higher, and the singling out of only a few companies which is frequently used in trade complaints, it seems like there might be reasons to consider it. Also consider that one way to get that global agreement is to start the process and convince other countries who want to have similar taxes that you're onto something and countries that don't want to see them imposed that having a global agreement means things are simpler rather than letting everyone do it themselves, and we have a few reasons why it might be worth it.
Remember that high pay is something of a moral gradient.
At one end you have recipients who are directly responsible for very high revenues and can't be replaced.
Next you have companies competing for top talent in an (overheated?) marketplace.
Then there are chains of interlocking executive and non-executive roles, where everyone votes in favour of a friend's remuneration at the other company. At best the participating companies are buying into a clique of highly connected and influential leaders. At worst it's legal looting from a balance sheet too big and too complex to notice.
Finally there's dear old akamaduri, also practiced in western societies, where that high pay for doing very little is in fact recompense for years of "friendly treatment" when that individual worked at the relevant public regulator.
Furthermore, the ratio between top, average and median pay in an organisation is going to depend very heavily on the actual work it is doing and the skills needed for its labour pool. Comparisons can only be made between organisations in the same business, but I suspect that that would still prove your point!
"I would weight (increase) the tax on global revenue"
That could mean companies abandoning the most tax happy countries or charging a large premium in those places so they are profitable enough to continue supporting. With something like an ad and PII supported business model, there isn't the option of raising prices other than for advertisers, which sends them fleeing, or what they charge for user PII packages. It's not like a widget they can boost prices on by 10% or so.
For a multi-national company, they might pay their execs over the top compensation and also have a lot of employees so robbing them and spreading the difference around really doesn't add up to much. I don't take that as a justification for the execs to keep getting that compensation, but it doesn't benefit employees in a meaningful way to take it from them and once given, there's nearly no way to take it back so the additional taxes will come from someplace else (user and customers).
"HMRC will clobber small business to death for missing penny of tax."
It's the same in the US. When I had a manufacturing company, it was a constant battle against government. When I see a Walmart or green energy company being handed millions, I have to ask why it was so hard for me to get a loan that I'd have to pay back. I shut the company down in 2008 mainly due to cheap Chinese imports and critical parts of my supply chain leaving the US for Asia. My competitors could buy components for far less and ship their products to the US to sell for less. The customer for a major product I produced was the government so they were more than happy to buy cheap crap from China over a much higher quality unit made in the US by people paying US taxes. The purchasing people thought they were saving money, but the cost in labor to replace one of the Chinese ones wiped that out in one go even before some of that purchase price being sent back to the government via taxes.
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