Time to Tax the Tech Titans?

There is a political consensus on both sides of the Atlantic that it is high time to tax the tech titans more robustly. But what is the best way to do it? And why is President Trump getting so defensive of the very firms he most despises? Victor Hill enquires.

To tax or not to tax?

Governments in Europe and North America have been talking vaguely about taxing the digital economy more effectively for some time. In the UK and elsewhere the idea has taken root that, because digital retailers like Amazon (NASDAQ:AMZN) and the rest have all but choked bricks and mortar retailers in the high street to death, they should at least pay for the (mostly forlorn) efforts to revive it.

Moreover, when a transaction takes place in cyberspace it is often difficult to determine under which tax jurisdiction that transaction has taken place. When my British readers buy my recent offering on Amazon.com, that transaction is booked in sunny Luxemburg. We all know that the tech titans have become adept at gaming the global tax system to their own advantage. The Republic of Ireland (I say this admiringly) has built its entire recovery post-sovereign debt crisis (2012) on offering sweetheart tax deals to the likes of Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) which largely book revenues through overseas holding companies.

Facebook (NASDAQ:FB) paid around £16 million in corporation tax in the UK in 2017 while Amazon paid just £4.6 million on an estimated UK turnover of £2 billion. Alphabet/Google (NASDAQ:GOOG) paid £49.3 million while Netflix (NASDAQ:NFLX) got a tax rebate last year to the tune of £174,000. In contrast, Marks & Spencer (LON:MKS) paid £88.1 million in tax last year, ASDA (owned by Walmart (NYSE:WMT)) £128.4 million and Tesco (LON:TSCO) £47 million.

It’s not surprising then that many people believe that the tech titans are not paying their fair share. Last year the Paris-based OECD was charged with the task of putting together a framework for taxing the tech sector and expects to report by the end of 2020. But several governments, most notably those of the UK and France, have grown impatient with the OECD and set out their own proposals.

In October last year the then Chancellor, Philip Hammond, announced a proposal – the Digital Service Tax – to impose a two percent levy on the revenues of social media platforms, search engines and online retailers. This would apply to all tech businesses with more than £500 million in global revenues and/or £25 million in UK revenues (i.e. from advertising, transaction and subscription fees). The Chancellor suggested that the tax was a temporary solution until a coordinated international initiative was agreed.

In early July, however, the CBI told Chancellor Hammond that his proposed tax on digital businesses should be scrapped. In their estimation it will impact not just the tech titans like Facebook and Amazon but innumerable medium-sized businesses as well. They claimed it risked harming the economy and made Britain – which has more tech unicorns than any other European country – look hostile to new tech businesses. They concluded that the tax was unnecessary anyway. They pointed out that Australia has decided to delay the imposition of its own digital tax until such point as the OECD reaches a consensus amongst its 36 member states.

Problems with the digital levy

One of the many problems in imposing a digital tax is the definition of what a social media platform consists of. We know that Facebook is a social media platform but there are innumerable small-scale message boards of one kind or another which offer a forum for their members to exchange opinions and to contact one another.

Under Mr Hammond’s proposals some dating websites would have been subject to the two percent levy. Even property portals such as Rightmove (LON:RMV) have expressed concerns that they might be subject to the levy. But are they the people who are putting the high street out of business? A lot of these web-based businesses operate on very low margins – so a two percent levy could significantly impact their bottom line. Takeaway app JustEat (LON:JE.) is one listed entity with revenues close to the threshold and has expressed deep concern.

And yet Netflix (NASDAQ:NFLX) and Spotify (NYSE:SPOT) would escape the digital levy altogether. The Treasury’s guidelines, issued in early July, state that any businesses which “stream, broadcast or publish media like film or music” would not be subject to the tax. Most video gaming businesses, where players can interact and “chat” with one another, it seems, will also be spared – as will financial services businesses.


The second issue is that the UK has been successfully promoting itself as a great place to launch fintech start-ups. If you want to be a business hub it is not wise to levy additional taxes which do not exist in alternative jurisdictions. The tax regime for digital start-ups is favourable in the Russian Federation – and so is the personal tax regime. I don’t see a fintech hub in Moscow quite yet – but why not? The point is that we are in a global competition to attract the best people and ideas. TechUK, the trade body which represents the UK tech industry, has expressed fears that UK tech firms could end up paying significantly more tax than their foreign competitors.

Thirdly, Mr Trump is not happy. In fact the notion of digital taxes makes him decidedly grumpy. The reason is that all the tech titans are American – and therefore a global punitive digital tax regime will disproportionately affect corporate America. Mr Trump does not care greatly for Mr Zuckerberg – and still less for Mr Bezos. But he cares greatly about the American advantage.

In the week of 08 July Mr Trump got into a Twitter-fight with the French. President Macron’s government, via the prominent minister for digital communications, Cédric O, is fast-tracking a tax assault on the US tech titans. The French are going for a three percent digital levy on internet companies with global revenues of over €750 million and €25 million in France. The French Sénat approved this measure on 11 July, with the tax due to be imposed retrospectively with an effective date of 01 January 2019.

This has prompted Mr Trump to threaten retaliatory measures against France such as tariffs on French wine. (Mr Trump is not an oenophile.) US Trade RepresentativeRobert Lighthizer has announced a Section 301 investigation into France’s digital services tax under the US Trade Act of 1974. Bruno Le Maire, the French finance minister responded rather verbosely: “France is a sovereign state that decides its tax measures with sovereignty and will continue to take sovereign tax decisions.”

TechUK has warned that American reprisals could hurt British businesses and consumers. US officials have warned that if the UK persists with its plans for a digital tax then the US would “determine what actions are appropriate to ensure a level playing field in global markets”.

Now that Mr Johnson is in the saddle as PM, it is very unlikely that he would seek to antagonise President Trump with the unlamented Mr Hammond’s proposals – even though he pledged during the prime ministerial contest to take action on this issue. He might prefer to wait and see how the French get on with their digital tax. And at a moment when American support might be useful in the Brexit end-game, he will rightly judge that the Digital Services Tax is more trouble than it is worth.

Outlook

It is unlikely that the taxation of the tech titans will really have much impact on their bottom line until such time as there is a coordinated international response. That may evolve after the OECD reports towards the end of next year – but Mr Trump, who will still be around, and very possibly with a second term under his belt, will not change his tune. Whatever you may think about the ethics of the matter, I can’t see that tech stocks will suffer in the short-term from the threat of digital taxes.

In next month’s MI magazine I’ll be looking at the likely impact of Facebook’s launch next year of a digital currency called Libra. (Spoiler alert: I think it will be massive.) As the tech titans transmogrify into fintech-style payments platforms which displace the traditional banking sector, the issue of how we tax them will become even more fundamental.

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Enter Prime Minister Johnson, who proved in the first hours of his premiership that (in Harold Wilson’s words) he is a good butcher. All three holders of the great offices of state are the children of immigrants and are Thatcherites! That is extraordinary. His widely expected appointment of Sajid Javid (an alumnus of Deutsche Bank (ETR:DBK)) as Chancellor – the only prime ministerial candidate to openly back the abolition of the 45 percent top rate of tax – confirmed his intention to be a tax-reformer (indeed, a tax-cutter). Austerity is dead; and shortly, like all expiring vampires, it will have a wooden stake driven through its heart…But how will the markets respond?

Next week I’ll conjure with the probable Johnson-Javid fiscal strategy. Once the convulsions of November are endured (more soon on that too), there might actually be some good news at last. In what extraordinary times we live.