Tech tax reforms

Tucked away in the Chancellor’s low-key Spring Statement last week was a reference to a Treasury document entitled Corporate Tax and the Digital Economy: Position Paper. It seeks to answer a question vexing governments around the world: how to extract tax revenues from global technology companies.

The existing international tax framework is based on the principle that the profits of a business should be taxed in the countries in which it creates value. But huge companies such as Amazon and Facebook avoid tax by saying they make no profit. In 2016, Amazon paid just £15m in corporation tax in Europe on estimated revenues of £19bn.

As the tech giants dominate more of the market and replace companies that contribute to the tax system, the revenue base that pays for public services starts to shrink. How to plug the gap? The Government’s preferred option is a multilateral renegotiation of corporate tax principles. But in the absence of such a reform, the Treasury is proposing a tax on digital company revenues. A similar EU plan for companies with significant online revenues to pay a 3 per cent tax on turnover for various online services will be discussed at the summit in Brussels today.

But while these ideas play well with voters the economics are bad. Taxing revenues rather than profits is never a good idea because it suppresses enterprise and innovation. Moreover, with Donald Trump poised to trigger a trade war by increasing tariffs on Chinese steel imports, the move will be seen in Washington as anti-american.

Governments cannot ignore declining revenues from tech giants but the solution is global corporate tax reform. The UK should lead the way.