The ‘digital services tax’ is a good idea in principle but it may be difficult to enforce

By Areeq Chowdhury.

In the budget this week, Philip Hammond has announced the introduction of a new ‘digital services tax’, first hinted at in his party conference speech in Birmingham. The tax, limited to tech giants which have annual global revenues of more than £500m, will be a levy of 2% on the money made from UK users.

Perhaps predicting the backlash it may create within his own party, he insisted the tax would not be passed onto consumers. Whilst it is difficult to see how this would be the case (small businesses may be faced with higher costs to advertise products on Facebook, for example) the ambition of trying to raise more taxes from tech giants is a good one. Companies like Amazon and Facebook are renowned for their low tax bills – in 2015, Facebook paid less than £5,000 in UK corporation tax – so shouldn’t the Government be doing more to ensure they pay their fair share?

The idea of taxing revenue instead of profit isn’t a new idea and is a similar conclusion to the one reached by the European Union who are considering plans to impose a 3% tax on global revenues, the so-called GAFA tax (Google, Apple, Facebook, Amazon). The Chancellor was right when he said the best solution in the long-term is a robust global approach towards taxing these companies, and the EU’s initiative could be one such method. Unlike traditional corporations, internet giants are as borderless as it is possible to be, making them uniquely difficult to raise taxes from. Where are profits made when a transaction takes place online? Is it the country where the buyers are, where the sellers are, or where the servers are?

Despite this, we should not lose sight of the need to move fast and think different with regards to taxation. The rise of the internet has created new, immediate, strains on public services all of which require funding, particularly in an age of austerity. Figures show that we are more likely to be a victim of cyber-crime than any other type of crime and numerous studies have found links between social media use and mental health problems.

The need is there and the proposed digital services tax, estimated to raise £440m a year, is a welcome attempt at addressing it. However, it is likely to be difficult to enforce. Companies already avoid paying large sums of corporation tax by shifting profits or using loopholes to reduce them, it isn’t beyond reason to imagine the same might occur with revenues.

So, what are the alternatives? We recently recommended the creation of a ‘civil internet tax’ on large social media companies which, instead of being based on profits or revenues, would be based upon the number of UK users they report to have. Akin to a tariff, a user-based tax would be difficult to avoid (Facebook either does or doesn’t have 40m users in the UK) and would recognise users as products sold by online platforms. A £1 levy of such a tax on social media companies alone, could raise more than £100m a year.

A similar idea has been proposed in the past by the Belgian economist, Paul De Grauwe, of the London School of Economics. His tax, however, is framed as a tax on ‘cost-free’ advertising revenue gained as the result of free content uploaded to the platform by users. For this, he suggested a levy of $10 per Facebook user which could either be returned to individual users each year or, instead, reinvested by the Government into public services.

Whatever the final proposals are (there will be a consultation on the digital services tax), the real question is how this new tax revenue will be spent. It is unlikely that the government will exempt tech giants from corporation tax as a result of this measure, so it could be a good opportunity to ringfence this new, additional, money for causes directly related to the internet, such as digital literacy and anti-discrimination initiatives, as we set out in our recent Kinder, Gentler Politics report.

Areeq Chowdhury is the Chief Executive of WebRoots Democracy.