United Kingdom to start taxing big internet companies

LONDON—Britain’s Treasury chief unveiled Monday a new tax on big internet companies’ revenues, insisting it is time that the global tech giants with profitable business in the U.K. pay their fair share for public services.

Philip Hammond made the announcement as he outlined his budget, explaining that while he preferred trying to find a global solution to address the borderless nature of the wealth of the likes of Google and Facebook, negotiations with other countries had been too slow.

He said the tax will be “narrowly-targeted” on the U.K.-generated revenues of specific digital platform business models.

“The rules have simply not kept pace with changing business models,” Hammond said. “And it’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the U.K. without paying tax here in respect of that business.”

Companies typically pay their taxes where they are based. But while local governments can impose a sales tax on physical goods in shops and restaurants, that has not been the case with online service providers.

And in the European Union, foreign companies like Amazon, Google and Facebook pay what tax they owe in the country where they have their regional base—usually a low tax haven like Ireland. So their business generates little to no tax revenue in countries, like the U.K., where they have significant operations.

Hammond said the digital sales tax will be structured to apply to “established tech giants” rather than tech startups and was at pains to emphasize that it was “not a online-sales tax on goods ordered over the internet.”It will only apply to firms making 500 million pounds ($640 million) a year in global revenues. The text will come into effect in April 2020 and is forecast to bring in 400 million pounds a year.

Dan Neidle, a partner at law firm Clifford Chance, said the tax could chill innovation and, given the dominance of the tech giants in the United States, would likely be met with a hostile reception by the Trump administration.

“For 100 years, businesses have been taxed based on where they are, not where their customers are,” he said. “The digital tax represents a revolutionary change - it taxes digital companies, regardless of their legal structure, if they have users in the U.K. There are many - particularly in the U.S. - who will regard limiting that revolution to one particular sector as opportunistic, particularly when it’s a sector where the U.K. (and Europe as a whole) have conspicuously failed to create world-beating businesses.”

The announcement came as Hammond splashed out on health services in a spending plan signaling the easing of eight years of austerity with a modest uplift in public spending and few major tax increases.

“Austerity is coming to an end - but discipline will remain,” Hammond said.