Digital services tax is the wrong fix

The digital services tax announced on Monday by UK chancellor Philip Hammond is the wrong fix for the right problem. Granted, even after previous crackdowns by politicians on digital companies, public anger is running high. Facebook paid just £7.4m in UK corporation tax in 2017, after making a record £1.3bn in British sales. Amazon’s main UK subsidiary shelled out only £1.7m. That is irksome for struggling high street stores saddled with steep business rates.

Hammond is imposing a 2% tax on UK turnover of big digital businesses from 2020. This would leave the four largest US tech groups each paying up to £40m more a year in the UK, based on 2017’s results, but it will not have much impact on the likes of Amazon. That will disappoint high-street shopkeepers. But the growth of online shopping has been driven by customer choice, not tax policy.

Turnover taxes are pretty silly to begin with. If poorly designed, they can recur at every stage of the supply chain. The cost advantages of tech giants are much greater than 2% of UK sales, in any case. Tech companies have been ingenious tax avoiders. But even if they gave up all their wheezes, they would not face big tax bills in the countries where many of their customers live. A big part of the value they create is thanks to the skill of software engineers in California.

A real solution requires radicalism. The outdated international tax system needs overhauling to allocate the right to tax cash flows to the countries where consumers live. Ad hoc taxes on tech giants are an unhelpful distraction.

Even these will be subject to well-funded resistance. Experts say there may be legal grounds for objections. Tech giants contribute little financially to many of the societies whose wealth and stability they depend on. Investors in them must buckle up for a bumpier ride. /London, October 30