MPs call for new tax on Internet giants to be introduced in ‘12 to 24 months’

Profile picture for user ddpreez By Derek du Preez March 27, 2018
Summary:
The UK is considering how best to tax the largest technology companies in the world, based on quantifying “user participation”.

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British MPs took to the House of Commons this week to have an extensive debate about how to effectively tax the world’s largest digital companies, with some calling for an interim sales tax to be introduced in the next 12 to 24 months.

The debate was raised by Neil O’Brien, MP for Harborough, who cited the government’s recent position paper, which considered how digital businesses could be taxed based on their “user participation”, rather than just sales or revenues.

The document stated that “the profits of a business should be taxed in the countries in which it creates value [and that] this principle is being challenged by business models for which value creation is in part reliant on the engagement and participation of users”.

The European Union has also signalled that it may introduce an interim tax for tech giants, which it suggested could be between 3% and 6% of revenues. However, there is also an international effort to establish a new standard for how the likes of Amazon, Google and Facebook could be more fairly taxed.

Such companies have been heavily criticised for using low tax EU states as havens to route their revenues through, in order to reduce their tax bills. They have all, in response to the public criticism, made some form of public commitment to pay more tax – whether that be through agreements with individual countries to pay some back-dated tax, or by making promises to route more money via the countries that they earn the money in.

However, the general consensus is that these ad-hoc promises aren’t enough and that a new global tax system needs to be established.

O’Brien kicked off the debate in the House by highlighting the complex nature of these digital businesses. He said:

What is the case for action? Put simply, international tax treaties were designed in an era when doing business internationally inevitably meant having to have physical premises, offices, factories and lots of people in the country where business was to be done.

However, today things are different. A large digital business could sell advertising to firms in country A, to be seen by users in country B, served off servers in country C, perhaps under a brand owned in country D, which is financed and owned by a company in country E. That business can ensure that its profits are booked in whichever jurisdiction taxes are lowest.

O’Brien cited Google as an example, where in 2014 the firm made approximately £4.3 billion of sales in the UK and that, in line with its global profit margin of about 26%, that would have meant about £1.1 billion of profits to pay tax on—and, in turn, a corporation tax payment of £220 million. However, that year it paid only £30 million in corporation tax.

O’Brien said it was “right” for the government to focus on the core concept of “user-created value”. He said:

What kinds of businesses does that mean we should try to tax? It means the free-to-use services that many of us use, be they search engines, social networks, app stores or online marketplaces; I am sure we could all name firms in all those categories. Those online platforms are not like other kinds of businesses, which perhaps create or store a bit of data on their customers; they are platforms substantially made up of user-generated content or have very valuable data from deep engagement with their users.

However, O’Brien added that any new tax has to be for the largest international businesses only, with generous allowances to carve out small firms, as the government does not want to hamper technology start-ups in the UK.

In addition, the tax has to make a clear distinction between tech businesses and other international firms, as the government “does not want to unravel the complex web of global tax agreements we have at the moment or come up with something that can never be agreed internationally”.

Action needed

Chris Philp, MP for South Croydon, noted, however, that any new tax based on user participation, which would require international agreement, will take time to implement, especially, he added, “when some of the companies concerned will use their influence to try to slow things down and stymie progress”.

As a result, he called for a “Plan B” that could be implemented much more quickly. Philp praised the EU’s proposal for a 3% tax on sales for the interim, but warned against the EU doing so as a central function - not something that will worry the UK after March 2019, after Brexit. But Philp urged the government to act quickly. He said:

A point ​that I want to make more for the 27 European countries than for us is that care should be taken to ensure that the EU does not use it as a pretext for retaining the tax receipts and developing a European Union treasury function for the first time. That will not, I think, concern us, but it might concern the other 27 members.

I advocate that if the European Union does not move quickly enough and implement the sales tax in a timely fashion—and by “timely” I mean that I hope it would happen in the next 12 to 24 months—the UK should take unilateral action.

A sales tax or, indeed, a user tax would not violate the principle of competitiveness to which my hon. Friend rightly referred. We are generally speaking the second largest market for the companies in question, behind the United States of America. We are significantly larger than Germany because our economy tends to be rather more intensively digital. I do not think that, if we took unilateral action, Google or Facebook would suddenly refuse to do business in the United Kingdom. If they did, they would be pulling out of their second largest global market.

Thinking about online markets

In addition to the discussion around taxation of the internet giants, Lee Rowley, MP for North East Derbyshire, added that there is a much wider conversation to be had about how the internet has commercialised over the past 20 years.

Rowley said that he was not talking about the many companies that use the internet to deliver services daily in a cheaper, and a more efficient and effective way. He said that he ‘welcomes and celebrates them as an excellent example of how capitalism works’.

However, Rowley added that there are a very small number of very large companies at the top of the tree that have created “what are essentially monopolies”. He is calling for a debate on the impact of these market structures. Rowley said:

They have essentially taken over whole swathes of industries. Some of them have created those industries, and all credit to them. Many of them have become very rich in doing so, or the people behind them have. But they have essentially annexed an individual industry. In any other area of commerce, we would call them out for what they are. They are monopolies or oligopolies.

If someone has 90% of the search engine market, they are a monopoly. If they have 100% of the social media market, they are a monopoly. If they have 47% of the e-commerce market in the United Kingdom, they are a monopoly.

We can debate the definition of monopoly, but there are monopolistic companies at the top of these industries, and we have to think in the longer term about how we address that. If we do not do so, we will lose the confidence of people that we can regulate effectively.

Either they have become so embedded that they are ​ultimately the infrastructure—they are the pipes upon which things run—and should be regulated accordingly, or we have to look at how we can stop monopolistic practices.

The first duty of those of us who are pro-free market and pro-capitalist is to avoid corporatism and monopolistic practices at the top. Perhaps that is a debate for another time, but it is important for the wider point about how we tax, because of the activities of those companies. The reasons why we tax them in the first place derive from some of the things that they do—some of the practices and some of the monopolistic instincts that, for good or otherwise, have grown up over the past decade or so.

My take

The British government’s position paper is a bold step in the right direction - but one that is going to take a long time to come into practice. Even if the government can figure out how to tax user participation, it’s a position that will need international agreement to work effectively. However, whatever way you look at it, there is cross-party consensus that these companies have had an easy ride for too long and something needs to change.