Britain to target online giants with new ‘Digital Services Tax’

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Sundar Pichai, chief executive officer of Google Inc., speaks during the Google I/O Developers Conference in Mountain View, California, U.S., on Tuesday, May 8, 2018. 

Britain said it would tax the revenue that online platforms such as Google, Facebook and Amazon make in the country to update a system that had not kept pace with changing digital business models.

“It’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business,” finance minister Philip Hammond said in his annual budget speech on Monday.

The tax will be designed to ensure established tech giants, rather than start-ups, shoulder the burden, Hammond told parliament, and “will apply to search engines; social media platforms; and online marketplaces. That is because the government considers these business models derive significant value from the participation of their users,” the proposal reads.

The tax will be paid by companies that generate at least 500 million pounds a year in global revenue — leaving companies like Facebook, Google and Amazon squarely in the cross hairs.

The Treasury said profitable companies would be taxed at 2 percent on the money they make from UK users from April 2020, and the measure was expected to raise more than 400 million pounds ($512 million) a year.

Britain had been leading attempts to reform international corporate tax systems, Hammond said, but progress had been painfully slow and governments could not simply talk forever.

Clifford Chance tax partner Dan Neidle said the radical nature of the proposal clearly showed that Britain was becoming frustrated with the slow pace of change in global tax laws.

“The UK is running ahead of every other country except Spain,” he said.

But given the dominance of U.S. tech giants, President Donald Trump’s administration may not appreciate the proposal at a time when Britain is trying to agree new trade deals.

Hammond said that if a global solution emerges, it would consider adopting this instead of its tax.

But in the meantime, the government would consult on the detail to make sure it got this right, and then ensure Britain remained one of the best places to start and scale up a tech business.

Amazon and Facebook declined to comment.

—CNBC’s Sara Salinas contributed to this report.