Mark this one down under ‘you don’t say!’. The UK’s Digital Services Tax, introduced back in April to get tough on the likes of Amazon, may be scrapped in the face of anger from the White House at a time when Brexit trade deals are on the table.
According to reports over the weekend, UK Chancellor of the Exchequer Rishi Sunak wants to drop the tax, based on 2% of national revenues generated by large digital companies, which is increasingly seen in Westminster as more trouble than it’s worth.
The official line from the Treasury in response to these reports has been mealy-mouthed:
We’ve been clear it’s a temporary tax that will be removed once an appropriate global solution is in place – and we continue to work with our international partners to reach that goal.
Given that the US walked away from those multi-national negotiations in June, such a global solution is a long way away and the UK - and others - will have to make decisions about their intentions far sooner than a viable face-saving international option is on offer.
As we’ve said all along, the UK’s posturing over clamping down on tax avoidance by major digital services providers was unlikely to survive for a number of reasons. It looks good politically to be issuing demands to largely US companies over paying - or not paying - their fair share of taxes, but in practical terms, enforcing collection isn’t as simple as the legislators rhetoric makes it sound.
The UK took the decision to impose its own national taxation based on local revenues after a collective attempt by the European Union (EU), led by France, crashed and burned. In common with a number of other states, the UK set its own rate - and in common with other states, attracted anger from US politicians who saw this as an attack on American firms operating in the EU.
That would be the case under any US administration, but the current government in Washington was absolutely the worst possible one to pick such a fight with. With Donald Trump running on a MAGA ticket to try to secure re-election as President, foreign efforts to ‘steal’ tax revenue from American coffers was only ever going to have one result. France, which is also going its own way, has been threatened with a cheese and wine war; with the UK, there’s an even bigger stick with which to beat - Brexit.
With a no deal Brexit now looking increasingly likely, the UK’s need to strike a trade deal with Washington is all the more critical and the Digital Services Tax is frankly just in the way. Chlorinated chicken and hormone-pumped beef may still be problems to be dealt with, but quietly dropping the tax plans is a concession that can be easily done. A post-Brexit Britain also wants to be able to attract US tech firms to increase their presence in the UK, necessitating moves to make it more attractive rather than less to expand operations there.
There’s also another complicating factor - COVID-19. The pandemic and the resulting ‘spend, spend, spend’ response from the UK Treasury to try to limit the damage to the economy has left the country with £2 trillion of debt - and counting. Against that, the £500 million that the Digital Services Tax was (very) optimistically predicted to generate per annum looks like a drop in the ocean.
Apart from the expediency of quietly stepping away from the new tax, there’s another political consideration to be factored in - how voters are likely to react to their digital services becoming more expensive.
Amazon, true to form, has announced that it will be passing on additional costs to its customers on the ground. So, on the one hand, politicos can get positive headlines for clamping down on tax avoidance. On the other hand, they can get less positive headlines as a result of their constituents having to pay more for their Amazon deliveries.
Any thesis that Amazon might be ‘shamed’ into absorbing the tax liability has rapidly been exposed as the political naivety it always was. The firm has told businesses in the UK that it will be raising fees by two percent from September, a deadline that may go some way to explain the scuttlebutt this weekend about dropping the tax plans. The firm says:
While the legislation was being passed, and as we continued our discussions with the government to encourage them to take an approach that would not impact our selling partners, we absorbed this increase. Now the legislation has passed, we will be increasing referral fees, fulfilment by Amazon fees, monthly storage fees and multi-channel fulfilment fees by 2 per cent to reflect this additional cost.
Some others have taken a more conciliatory stance so far, most notably eBay, which has written to its sellers in the UK to promise that there will be no new costs passed on:
eBay is one of the marketplaces which will have to pay the new tax – and a lot of you have asked whether we at eBay will be passing on this tax to our sellers in the form of new fees. We wanted to reassure you that we won’t do that, so you will not be charged additional new fees as a result of this tax.
But there’s no sign that the likes of Facebook, Google or other major digital services providers are set to take a similar stance…
Basic lesson - if you’re going to posture and pick fights with US tech firms for the benefit of some domestic good PR, make sure you’re (a) willing and (b) able to follow through. And try not to do it when you desperately need to strike a deal with the US government…