LONDON — When it comes to tech, Britain wants to have its cake and eat it, too.
The U.K. moved on Monday to extract more tax from the likes of Google and Facebook, even as London pushes aggressively to make itself as welcoming as possible to the tech industry as the country prepares to leave the European Union next year.
In his final budget statement before the U.K. leaves the EU next March, Chancellor Philip Hammond jumped ahead of European Union policymakers and the 36-member Organisation for Economic Co-operation and Development (OECD), which are also drawing up proposals, by setting out his own timeline for a new tax that appears to be aimed squarely at the likes of tech behemoths Google, Facebook and Amazon.
The proposals place London ahead of others eager to squeeze out extra income from Silicon Valley, whose businesses have pocketed oversized profits in recent years to become some of the worlds most valuable companies. But by taking on Big Tech, British policymakers are betting these same companies will not jump ship from Britain after Brexit, after the likes of Google and Facebook announced multibillion-pound investments in London, arguably Europes biggest tech hub.
“The rules of the game must evolve now if they are to keep up with the emerging digital economy,” Hammond told U.K. lawmakers. “It is only right that these global giants, with profitable businesses in the U.K., pay their fair share towards supporting our public services.”
The Digital Services Tax (DST), which the Treasury estimates will raise £1.5 billion over four years, will apply a 2 percent levy to revenues derived from the activities of U.K. users of search engines, social media platforms and online marketplaces. Its not an online sales tax but one that targets revenue generated thanks to data collected from users.
It is similar, although not identical, to proposals being discussed in the EU — and strongly pushed by the French — for a 3 percent levy on digital revenues generated within the 28-member bloc.
The proposal will include a so-called double threshold preventing businesses with global sales of less than £500 million from being hit by the new levy and exempting tech companies first £25 million of U.K. revenues. The safeguards are an attempt to allay industry concerns that the growth of small and startup businesses could be stifled by the new measure.
The Treasury also said in a briefing document there would be a “safe harbour” to ensure only profitable companies pay the new tax.
The Office for Budget Responsibility, the U.K. governments tax and spending watchdog, confirmed the tax is expected to come from “a handful of large businesses” — mostly relating to advertising revenue and the commissions charged by online marketplaces. It warned that the estimated £400 million a year tax take is highly “uncertain” because of the “data, modeling and behavioral complexities involved.”
One Treasury official said they are “treading softly to start with” and they hope it would “encourage other countries to act too.”
A consultation on the plans is due to be launched in the coming weeks. The move coincides with French-led efforts to impose a Europe-wide tax on digital services, which has so far run into opposition from a number of countries led by Ireland. French Finance Minister Bruno Le Maire flew to Berlin last week to lobby his German counterpart on the idea, which has stirred fears of U.S. retaliation. Londons move could prove a nudge for Berlin to approve a compromise.
The British chancellor, who is under mounting political pressure to pump more funds into the U.K.s cash-starved public services, has already come under heavy fire from industry, which warned the move risks undermining the U.K.s reputation as the best place to start a tech business or to invest.
Ministers are banking on the continued success of the U.K. tech sector post Brexit, but Julian David, chief executive of U.K. tech industry body techUK, said the digital services tax proposal would be “bad for investment and bad for the U.K. economy.”
It “cut across the grain” of Hammonds more positive budget narrative that the U.K. is open for business and prepared to embrace the future after it leaves the EU, David said.
Jose Castaneda, a spokesman for the Information Technology Industry Council, which represents major U.S. tech companies, said the digital tax could “create a chilling effect on investment in the U.K. and hinder businesses of all sizes from creating jobs.”
Both he and David urged the U.K. government to address the issue through the OECD. Hammonds 2020 timeline risks cutting across the OECDs plans, which aim to reach consensus by 2020, David said, adding: “It would be bizarre if the U.K. were to implement a new tax just as real and substantive international action is being reached.”
Progress at the OECD level has been slow and there is as yet no clear timeline for an international reform of digital or corporate taxation. Hammond insisted the U.K. would continue to work with the OECD and G20. If an appropriate international solution is found, the U.K. will “dis-apply” the tax. It will also be subject to a formal review in 2025, the Treasury said.
“This approach risks undermining the U.K.s reputation as the best place to start a tech business or to invest. The £500 million threshold the chancellor proposed is low and risks capturing much smaller companies than anticipated. techUK will engage with the chancellors consultation but it is vital that policy is developed based on the reality of how businesses work, not on theoretical models of how they operate,” said David.
American policymakers have also argued against the idea, pressing for a multilateral approach through the OECD.
U.S. Treasury Secretary Steven Mnuchin last week issued a statement expressing “strong concern with countries consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies.”