The tech tax sounds like a great idea... but it's really not that simple

The Treasury has a lot of thinking to do about how they will implement a revenue-based tax.

by Stephen Jones
Last Updated: 23 Feb 2018

When Mel Stride, Financial Secretary to the Treasury, spoke to the BBC about the possibility of restructuring the tax levied against the tech giants he was rather coy. Far from going into specifics, the language was that of ‘situation’, ‘taxing fairly’ and ‘potentially preferred option’.

Are we to interpret this as merely the evasiveness of a media trained politician, sensitive to release policy details, or rather (and more likely), the fact that he just doesn't quite know how they are going to do it.

On the face of it, taxing the revenue over pre-tax profit seems like the sensible option. The tech giants have a nasty habit of booking sales in low tax jurisdictions like Ireland and Luxemburg, resulting in situations like Google (now Alphabet) making revenues of around £5.5bn from the UK in 2016, but only declaring £1bn in turnover. But it really isn’t that simple.

Who? What? Where? When? How?

In general, it's rather tricky to tax multinationals providing services based on intellectual property. Let's say you design a phone, then your subsidiary in France sells it. The revenue for the French sales is earned in France, but the cost of designing it was incurred in Britain. Normally firms like Apple would effectively charge their own subsidiaries to represent that division's share of the central costs - this wouldn't recognise that.

Another question is where the government sets the threshold over which companies get hit by the new tax. The obvious big four spring to mind, but many other companies have large online businesses and could fall into the category of 'social media platforms, online marketplaces, internet search engines' that Stride suggested.

Furthermore, there is a very real risk that the Treasury could inadvertently tax companies that are yet to turn a profit or are making a loss. Technology companies are known for the relentless reinvesting of funds back into the business (Amazon for example was not profitable until fairly recently), so you could argue it would just undo an unfair advantage, but do we really want to stifle home-grown high growth tech companies in the process?

Then of course there's the diplomatic issue. A unilateral revenue tax could prompt an unseemly, not to mention unpleasant tit-for-tat. Let's not forget, Stride was talking as the OECD (Organisation for Economic Co-operation and Development) is compiling a report on how to increase the tax paid by the tech giants - the Treasury might want to wait before taking a bite out of this apple.

Image credit: Michaelangeloop/Shutterstock

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