An employee works on a laptop computer at the Britain Stronger In Europe campaign offices in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

U.K. Targets Tech Giants With a Digital Services Tax in 2020

(Bloomberg) -- Commonly seen as a tech-friendly hub, the U.K. is now targeting the likes of Alphabet Inc. and Facebook Inc. by introducing a digital services tax, joining the growing chorus against cash-rich tech giants.

U.K. Chancellor of the Exchequer Philip Hammond unveiled the measure in his Autumn Budget in London. Aiming to raise 400 million pounds a year ($512 million) for the government, Hammond said the tax was designed to hit the largest internet businesses -- not consumer or internet startups.

The introduction of a digital tax makes the U.K. something of a front-runner compared with other governments. The European Commission is proposing a digital tax on revenue that tech companies make from areas like ads and data, but has yet to agree on terms.

“We will consult on the detail to make sure we get it right, and to ensure that the U.K. continues to be the best place to start and scale-up a tech business,” Hammond said. “It will come into effect in April 2020.”

The U.K.’s tax will be aimed at big tech, affect companies that were profitable and with annual revenue of at least 500 million pounds. Although a temporary measure, it follows the Chancellor of the Exchequer’s comments during a speech at the Conservative Party conference Oct. 1 that the U.K. would “go it alone” if a EU version of the tax continue to stall.

Representatives for Alphabet’s Google, Twitter Inc. and Facebook did not immediately return a request for comment.

Tech companies have been busy expanding in the U.K. in a bid to harness its highly skilled workforce. Google is among a host of major tech companies including Snap Inc. and Apple Inc. that are doubling-down on expanding their London offices, despite the uncertainty around the U.K.’s exit from the European Union.

Tension has also continued regarding how much tax these companies pay in Britain. Amazon.com Inc.’s U.K. business saw its 2017 corporate tax bill drop by about 40 percent, despite a tripling of its profits in the country.

Amazon U.K. Services Ltd., which provides delivery and corporate services to the company’s businesses in the U.K., booked revenue of 1.98 billion pounds in 2017. However, its U.K. corporate tax fell to 4.56 million pounds, down from 7.4 million pounds a year earlier. “We pay all taxes required in the U.K. and every country where we operate," an Amazon spokesman said in a statement at the time.

Google paid just $16 million in U.K. corporation tax from 2006 to 2011 on $18 billion of revenue, according to a government investigation in 2013.

Controversially, the U.K. digital tax -- which will levy a 2 percent tax on certain business models -- would target the global revenue of these tech giants and not profits, according to tax practitioners, potentially making the country a less attractive place for the companies to supply their services. Startups will not be in scope for the tax, Hammond emphasized.

The U.K. digital tax joins a number of various propositions wielded by politicians and those within the tech industry, attempting to force tech giants to pay more. French president Emmanuel Macron wants the EU to use the tax revenue to help cover a Brexit-induced budget shortfall, while San Francisco voters in November will decide whether to levy an additional tax on large businesses to fund homeless services, part of an expanding effort among West Coast cities to tap cash-flush companies to offset growing income inequality.

The EU version of the tax, which would require the unanimous support of the bloc to be passed, is being blocked by countries including the Czech Republic, which argue the cost of collecting the tax would be higher than the revenue it would generate.

Russ Shaw, founder of Tech London Advocates, an industry body, said the digital services tax was "a prudent step" but "the wrong approach."

"Tackling the digital tax question without coordinating efforts with the U.S. and EU as key global partners," he said, "will only further entrench Britain in an isolationist position we cannot afford."

The digital services tax was first proposed by the U.K. government in a report on taxing the digital economy published in November 2017. The EU followed the U.K. with its own version of the proposed tax that it would apply to digital companies with total annual worldwide revenue of 750 million euros ($860 million) and EU revenue of 50 million euros.

Several international bodies, including the Organization for Economic Cooperation and Development and the G20 group of industrialized nations, have been working on ways to crack down on corporate tax avoidance, especially by large internet and software firms.

Hammond said this multinational approach was the best option, but that negotiations in these international organizations was slow and the U.K. could not afford to wait. He said that if a better tax solution emerged from the G20 before April 2020, the U.K. would consider adopting that instead of its own policy.

©2018 Bloomberg L.P.