The digital services tax has reaped almost £360m from US tech giants including the first year Amazon, Google, and Apple, growing better from digital businesses than they have been paying in UK corporation tax.
A National Audit Office (NAO) report found the UK’s digital services tax, introduced in April 2020 and imposes a 2% charge on the gross revenues made by digital titans running search engines, social media services, and online marketplaces, hauled in 30% more than the government forecast in 2021.
The government, which considers the tax could cumulatively get in better than £3bn by 2024-25, outperformed its first 2020-2021 annual target of £275m because of the online sales boom during the pandemic.
Gareth Davies said the digital services tax has succeeded in raising more tax from some big digital companies and has brought in more money than forecast in its first year, the head of the NAO. He said UK leaders had not identified any firms failing to comply with the tax, but HMRC could even face challenges implementing compliance, especially among groups without a physical presence in the UK.
The tax levied on gross revenues from digital advertising sales, and e-commerce sales companies including Amazon, Apple, and eBay make from third-party sellers on their sites but do not capture direct online sales to consumers from retailers such as John Lewis and Tesco.
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It targeted the largest firms, with worldwide digital revenues of over £500m, and revenue derived from UK users of over £25m.
Tech giants in Amazon, Google, and Meta-owned Facebook historically paid relatively little corporation tax in the UK. Because they typically ensure their British operations make very little profit, instead funneling earnings through low-tax jurisdictions such as Luxembourg and Ireland.
The NAO said that generally the 18 companies that paid the DST, announced in the 2018 funding, had a more elevated bill than the £351m they collectively paid in UK corporation tax. Link building companies has also generated a large revenue in UK.
Around 90% of DST composed in 2021-22 comes from just five large business groups, said Meg Hillier, chair of the committee of public accounts. HMRC ought to test whether all businesses – not just the low-hanging fruit – are paying their fair share.
The government has not called any, liable for DST, however, businesses including Amazon, Google, Apple, and eBay have publicly admitted weakness for DST.
The report also found that HMRC has identified many more businesses that charged the tax, a total of 101 evaluated.
However, a future analysis may be challenging as HMRC identifies more business groups that have different characteristics and attitudes to paying DST, the report said.
Amazon, Google, and Apple say they have passed the 2% tax on the bills of the third-party businesses and sellers that use their sites.
The DST will only be in business for a rare years after the UK state decided last year to phase it out, preventing the threat of retaliatory tariffs on British products from the US.
From 2024, it will be replaced by a new global tax system after the OECD brokered a deal between 136 countries, including the UK, that will result in large multinational companies paying tax in the countries where they do and committing themselves to a minimum 15% corporation tax rate.
The United Kingdom is going it alone with a proposal for a digital services tax (DST) to increase the tax tech giants such as Facebook and Google pay in the UK. The DST confirm by Chancellor Philip Hammond in his Budget at the end of October.
However, experts warn that international tax reform is needed, not only for tech companies but for taxation as a whole, to address public and political anger over the relatively small amount of tax major companies pay.
The DST will tax a company’s gross revenues at two percent and apply to profitable companies that generate at least £500m a year in global revenue and at least £25m in annual revenues from activities linked to the participation of UK users.
Kemp notes that the DST’s objective is different from that of the diverted profits tax, which took effect in the UK in 2015 and is often labeled the Google tax. The diverted profits tax is implemented not to manage money but to switch behaviors, says Kemp, who says the DST is, in contrast, a straight revenue raiser.
The Chancellor was keen to point out that the DST won’t target tech startups; it won’t apply to the first £25 million of a business’ UK taxable revenues.
Some tech firms are also concerned about the impact on innovation. Francesco Capita, Co-Chair of the IBA Taxes Committee and a partner at the law firm Macchi di Cellere Gangemi, explains that digital service taxes typically aim at avoiding the erosion of taxes in the countries that implement them. The underlying assumption is that tech companies do not pay their fair share of taxes in the countries where the customers are based because they do not have a physical presence in such countries, he says. Under such a perspective, digital services taxes seek to stop a distortion that favors tech companies versus old economy companies. Eliminating a distortion as such should not affect innovation.
The reaction from the United state closely watched. On 31 October the US House of Representatives Ways and Means Committee Chairman Kevin Brady criticized the proposed DST as a blatant revenue grab that singles out an industry where US companies dominate.
The tech firms likely to be affected by the DST pay tax in the US. While the UK government does not believe the DST covering by double taxation treaties, Kemp thinks these US firms will strongly argue the opposite. At a purely legal level, the US can’t stop the UK taxing how it wants to,’ says Kemp. However, The US can apply political pressure, especially when the UK is looking for a trade deal.
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