Hopes of a comprehensive free trade agreement being struck between Britain and the United States took a hit this week (March 29) as the Biden administration threatened to implement tariffs on UK goods in retaliation to a new tax on big tech companies.
Introduced on April 1 last year, the Digital Services Tax (DST) is a 2 per cent levy on the revenue of companies operating search engines, social media services and online marketplaces, which derive value from UK users.
This is to say it is a tax on the likes of Facebook, Microsoft, Apple and Google, which typically pay very little tax in the UK, despite generating billions in advertising revenue from advertising to their UK users.
Getting the tech giants to pay their fair share is something that governments across the world have been trying to do for some time.
But the Office of the US Trade Representative has said the DST is “discriminatory” and places an “unreasonable” tax burden on US companies.
Moreover, it has responded with a warning to raise tariffs of up to 25 per cent on a number of UK exports including ceramics, make-up, overcoats, games consoles and furniture.
The tariffs would generate around £236 million, which is what the US believes the UK stands to get from US tech firms through the DST.
Similar warnings have been made to other countries across Europe, which are also considering new tax policies.
Almost all of the biggest technology firms in the world are American, which explains why the US Trade Representative is taking such a strong line on new taxes.
But the fact remains that the so-called FAANG (Facebook, Amazon, Apple, Netflix, Google) companies have been avoiding tax on an industrial scale and something must be done about it.
HM Revenue and Customs has justified the DST by stating, “the application of the current corporate tax rules to businesses operating in the digital economy has led to a misalignment between the place where profits are taxed and the place where value is created”.
This is true. The current international tax framework makes it far too easy for tech conglomerates to funnel profits away from the places where they are made.
Google is a prime example of this.
The company’s UK subsidiary paid just £44 million in corporation tax in the year to June 30, 2019 – the most recent accounts available – despite generating £1.6 billion in revenue.
It also put hardly any advertising revenue through the UK business (Google UK Ltd), which is used primarily as a marketing and sales division for Google’s European operations.
The European headquarters are infamously located in Dublin.
Ireland has one of the lowest corporate tax rates in the world at 12.5 per cent, but that’s not the only reason Google and other multi-nationals are based there.
Many incorporate in the Irish Republic to take advantage of what’s called the ‘double Irish’ tax scheme – a tax code that allows companies to be based in Ireland but be tax resident in another country.
Google has used this scheme to funnel its global profits to offshore tax havens like Bermuda and the Cayman Islands.
The double Irish scheme was abolished for new companies in 2015 but was only just phased out for existing firms like Google last year.
Almost all of the other tech giants are doing similar things to avoid paying tax, finding regulatory loopholes and accounting tricks to get around paying what they owe.
Analysis by taxwatch.org estimates that, between 2012 and 2017, the top five tech companies with operations in the UK (Google, Cisco, Facebook, Apple, Microsoft) avoided £5 billion in tax.
In 2018 alone, the figure was thought to be £1.3 billion.
This history of tax avoidance, coupled with widespread concerns about governance and data privacy on tech platforms, makes it easy to see why the UK Government wants to act.
It also makes the US position all the more difficult to defend.
President Biden has inherited the DST dispute from the Trump administration and has opted to proceed in much the same way as his predecessor.
This could have been an opportunity for the new White House to demonstrate its commitment to reigning in the enormous financial power of big tech, something that worries citizens on both sides of the Atlantic.
Instead, it has chosen to use international trade as a means of implementing its will, much like Mr Trump did.
An international solution to the problem of taxing technology companies more effectively is in the works and has been the subject of many meetings at the Organisation for Co-operation and Development (OECD).
The UK has also said it will repeal the DST once a new global framework has been agreed.
But in the meantime, the DST shows that the Government is at least trying to engage with an issue that seems grossly unfair to the average onlooker – that the richest companies in the world are paying the smallest percentage of tax.
The US should think again on its tariff warning and focus its efforts on finding an international solution.