Digital Taxation: A Step Forward for the Tech Economy

On October 26, 2018, Chancellor of Exchequer Philip Hammond stated, "It's clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business" at the annual budget speech, regarding his proposition of a two percent digital tax on revenues earned by foreign tech companies in the UK. 

The digital tax is poised to target large-scale tech companies, specifically, those who earn at least £500 million a year in global revenue. Careful to protect and encourage technological innovation in the UK, Hammond stated that the tax “will be carefully designed to ensure that it is established tech giants, rather than our tech startups, shoulder the burden of this new tax.” Hammond stated that the tax would affect “specific digital business models”, namely social media sites, search engines, and online marketplaces, clearly aimed at industry leaders such as Amazon, Google, Facebook, and eBay.  

The current tax laws do not account for the online revenue made by foreign businesses in the UK. Companies pay taxes in the countries in which their headquarters are located, namely the US. The proposal would allow the UK to tax foreign companies’ revenue generated in their country, despite a lack of a physical presence, subsequently elevating digital taxation on par with taxation on traditional brick and mortar operations.  

Despite Hammond’s attempts to protect the domestic technology industry with his focus on solely taxing well-established businesses, concerns have arisen regarding the UK’s appeal to foreign investors, as well as a decrease in the quantity of labor demanded by these American tech giants in the UK. Additionally, the resistance by the largely America-based companies has created political tension. As the US adopts an increasingly protectionist approach to its finances, the impact of the digital tax could potentially yield negative implications on US-UK relations.  

The UK is not the first country to propose a digital tax. On March 21, 2018, the European Commission proposed a three percent digital tax. Canada also had its own talk of a digital tax, but the suggestion was viewed unfavourably by the Trudeau administration and ultimately rejected. During the Australian annual budget reveal on May 8, 2018, the Australian Finance Minister Mathias Cormann expressed a desire to take action, stating that, “[the] next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax.” This lack of resolution amongst the parties involved regarding this increasingly heated issue has led many to question how the Organization for Economic Cooperation and Development (OECD) will resolve the countries’ concerns.  

During the G20 finance discussions, which occurred from July 21–22 2018 in Buenos Aires, OECD Secretary-General José Ángel Gurría stated, “Clearly, the faster we converge on the what, the how, the when and the how much about digital taxation, the faster we can define a common roadmap towards implementation of a policy whose main tenet we all support.” While the overwhelming consensus was in favour of a multilateral agreement, countries have begun taking matters into their own hands. During his annual budget speech, the Australian finance minister stated that a delay in arriving at a multilateral solution would only lead to individual jurisdictions pursuing their own courses of action. Ultimately it seems that a multilateral action will focus on coordinating the plans already established by individual countries.  

The Tech giants being taxed also face strong repercussions if digital taxation laws are passed. While most companies refrained from making statements, it is evident that this digital tax has been met negatively by large tech companies who will face increased business costs as a result of the taxation. Historically, Google has responded poorly to increased taxation, ceasing Google news operations in Spain as a result of a copyright tax. Subsequently, it becomes increasingly clear that a universal decision regarding digital taxation must be made soon. It is unlikely that these large tech companies could justify the cost of shutting down in more than one country.  

Hammond has stated that the tax is estimated to be implemented by April 2020 and to earn approximately £400 million annually. This revenue, while certainly beneficial to the UK government, may also have positive implications for consumers if the revenue is used in a manner that maximizes welfare. However, the taxation could also result in higher prices for consumers. Depending on the elasticity of demand of the goods provided by these tech companies, the tax burden may fall disproportionately on the consumers. Canadian Prime Minister Justin Trudeau expressed his concerns, suggesting that Canada would not partake in a digital tax primarily because of this negative impact on taxpayers and consumers.  

Ultimately, while the UK is the latest country to speak out against unfair taxation policies towards large tech companies, they certainly are not alone in their concerns. The issue of digital taxation is the result of a shift from traditional markets of foreign sales to our current age of digitalization. Profits can now be made anywhere across borders. Taking into consideration the effects on businesses, consumers, and respective countries’ tax revenues, the possibility of a universal agreement appears slim. Regardless of whether the resolution is unilateral or multilateral, it is time our models of taxation caught up to advances in technology.