Time for Britain to weaponise its Google tax

With the EU and US both keen to sign trade deals, a digital sales levy is a powerful bargaining chip

There are bad taxes and really bad taxes. On multiple fronts, the proposed “digital sales tax” (DST) on US tech giants falls into the latter category. At a time when Britain is simultaneously leaving the EU, attempting to strengthen its trade ties with the US and trying to promote its digital industries as economic world beaters, it almost beggars belief that it should be joining with its European neighbours in imposing something that is as much a protectionist tariff as it is a reasonably applied tax.

OK, so we all know the arguments. As with most taxes, the intention is fair enough. Digital services are supplanting physical products as a form of economic activity at a frightening speed, while e-tailers, search, gaming and social media are fast making shops and other physical premises redundant. Our high streets, factories and offices are in a state of ruinous decline, threatening not just the fabric of local economies, but large parts of the traditional tax base.

The leviathans of the new commercial landscape, meanwhile, stalk the land, ruthlessly exploiting our markets, hoovering up our data and destroying traditional sources of employment. At the same time, they conspire to pay as little corporation tax as possible by offshoring their profits – unfettered market access which is unmatched by any sense of obligation.

Consider the example – cited by the Harvard Business Review in a recent article – of a local newspaper that employs hundreds of local workers in its office, printing and distribution facilities. With the emergence of a news website that has no physical presence in that country, relies on freelancers and locates its head office in a tax-friendly country like Ireland or Luxembourg, the newspaper fast becomes obsolete. Local advertisers shift en masse to the new internet company. Once secure forms of tax revenue disappear, forcing central and local government to cut spending even as the pressure grows for higher welfare for those the digital alternative has put out of work.

This wouldn’t matter much if the companies offering these new digital services were local in origin. Such firms would presumably create lots of new jobs in the digital economy and pay their taxes accordingly. The problem occurs because all such services tend to be global in reach; the first movers, the vast bulk of which are American, will enjoy powerful network effects and consequent economies of scale that make it hard for local competition to establish itself. Previously local markets get subsumed within unaccountable global ones.

Even so, a new tax needs to be fair, equitable, simple, transparent and economically efficient. By attempting to shift the basis of corporate tax for these industries from net to gross income – or from profit to revenues – the DST comprehensively fails these tests. It is complicated, discriminatory, fuzzy on definition and is likely to do a lot more harm to promising UK pretenders than any of the US tech giants it is aimed at. Other nations can impose such a tax if they want, but the UK should not be joining them. The wider advantage from greater levels of inward investment and innovation is likely to far outweigh any benefit to the Government in extra tax revenues.

The populist appeal of such taxes is nonetheless obvious. The tech giants are these days everyone’s favourite bête noire – with undeniable good reason in many instances. Tech bashing has taken over where banker bashing left off. But these are the industries of the future. With the City possibly on the wane as a source of employment, tax and growth, attracting and encouraging digital industries must take priority over short-term political point scoring.

Be that as it may, for the time being, it is full steam ahead. The DST is a manifesto commitment for the Government, and despite – or possibly because of – threats of retaliation from the White House, the Chancellor, Sajid Javid, says he is not for turning. “If people want arbitrarily to put taxes on our digital companies,” US Treasury Secretary, Steven Mnuchin, said this week, “we’ll consider arbitrarily putting taxes on car companies.”

Small wonder that the UK Government has reacted badly. To leave the EU only to have our sovereignty compromised by the US instead would not be a great outcome. Yet the best way of looking at Javid’s intransigence is that he has learnt from Britain’s disastrous EU withdrawal negotiations.

Lesson number one is that you don’t give away your best cards before getting something worthwhile in return. The beauty of the DST is that it can be used as a negotiating tool in trade talks with both the US and the EU. By agreeing to scrap the tax, the UK can extract important countervailing concessions. Alternatively, by agreeing to align itself on digital taxes with the EU, the UK can expect greater access to the single market in return. The one can be played off against the other.

Eventually, a decision has to be made on which way to jump. But with both the US and the EU keen to sign reasonably accommodating trade deals with Britain, it’s not a bad place to be.