Taxing Big Tech: The Next Steps

Big Tech companies like Google, Amazon and Facebook have avoided paying proper taxes on their profits in every country in the world for many years now. Like wayward children focused on fun and games, every time a government introduces new rules to try to stop tax avoidance happening, they find another loophole or trick to escape capture.

For the rest of us, it’s long since stopped being funny. With the pandemic particularly, government resources to help the poor and vulnerable are running short. The spectacle of giant corporations, who thrive on our social isolation, experiencing extraordinary economic success at the same time, means that voices clamouring  to close the gap now come from across the political spectrum.

But how actually do you stop it happening, even if you want to?

The problem has been causing sleepless nights for clever people for nearly a decade now and has led to at least three rounds of initiatives.

Round One – International Agreements

Multilateral institutions like the OECD have been building complex new rules to prevent ‘profit shifting’ by multinational companies since 2012. And although this has met with some success, finding agreement on how to tax the new digital economy remains bogged down. Opposition from the US government has been key to this lack of progress.

Because of this impasse, national governments have become impatient and started introducing their own rules.

Round Two – Diverted Profits

Tax In the UK, following pressure from all parties, the then Chancellor Philip Hammond introduced a diverted profits tax in 2015 aimed at multinational corporations, both digital and otherwise.

Although, in January 2020, the UK government announced that it had secured a significant additional £5 billion of tax, much continues to be avoided by Big Tech companies particularly.

Round Three – Digital Service Tax (DST)

In the UK in April 2020, a digital services tax went into effect at a rate of 2% on all UK sales of very large companies providing search engines, social media services and online marketplaces. This approach, of a tax on sales rather than profits, has now caught on globally in various forms and, at the last count, 36 countries have implemented or announced plans for such a tax.

Round Four – A pandemic windfall tax?

As we have explained in previous articles, when you look at the rates of Digital Sales Taxes (DSTs) in other countries, it appears that the UK’s rate is relatively modest. In Turkey it is set at 7.5%, in the Czech Republic 7% and in Austria it is 5%.

In July this year, we proposed increasing the DST to 10% during the pandemic in order to help finance the very costly social and health interventions the pandemic has required. This kind of approach has been suggested elsewhere too since then with, for example, Tom Kibasi writing in the Guardian suggesting that a rebalancing “could be accomplished through a special levy – calculated as a percentage of UK sales – for the decade ahead.”

At Ethical Consumer we have been working on a campaign for a windfall tax for big tech companies.

Problem 1: Passing the tax onto consumers

While it looked like a good idea at the time, since then it appears that many of the Big Tech monopolies have no intention of eating into their profits by paying the taxes as intended. Instead they are simply, and openly, passing the costs onto their consumers. Well-known tax commentator, Richard Murphy, has pointed out that, as most of the companies are effective monopolies – a DST was always going to be the “easiest tax on Earth to pass on”.

This is naturally creating an aggrieved cohort of consumers and sellers who, seeing their costs go up, become opponents of the new tax regimes. One of the interesting developments here is public comments from two companies (Facebook and eBay) that they are not intending on doing this. We have compiled a small table below with position statements on the DST from those companies we know that have made them.

Problem 2: Amazon is off the hook again

When the DST was designed, the government stopped short of applying it to product sales to consumers (as opposed to services which were taxed).

This was because of concerns that it might adversely affect traditional retailers such as John Lewis. The upshot of this was that Amazon, one of the most problematic tax avoiders of all, escaped the tax on its own product sales.

The fact that Amazon has chosen to pass on the DST to its Amazon marketplace third party sellers (who are being provided with a service), rather than eat into its own profits, has drawn particular ire from a wide range of commentators. Andrew Goodacre, chief executive of the British Independent Retailers Association, apparently said: “All it has done is resulted in small sellers paying more and making less while Amazon gains further competitive advantage.”

Where now for Ethical Consumer’s 10% DST campaign?

Given that consumers and sellers are already aggrieved that the 2% DST is being passed onto them, they are likely to be even more unhappy about the idea of a 10% rate. It is difficult, though, to think of another way that windfall taxes might easily be applied to tech multinationals. Profit taxes, the usual way for governments to make windfall provisions, are not going to work because the companies have already made the profits magically disappear.

A levy on assets, which was applied to the banking sector after the 2008 crash, would not really work here either since so many of these are offshore for tech firms too.

Until a better idea comes along, it is therefore worth thinking about modifying the request to government. In addition to raising the rate of DST to 10% on a temporary basis, we should probably ask to amend the rules at the same time in order to rectify the problems that have arisen in its first iteration.

In order to capture the sales of Amazon and start rebalancing the UK economy towards other less aggressively tax avoiding retailers, it will be necessary to extend the current DST to product sales.

If there is a desire that such a change should not bring John Lewis and others within its scope then an exception should be made for companies which can meet high standards of tax transparency, and are thereby able to evidence that no artificial avoidance is taking place. The Fair Tax Mark has devised a robust set of rules which have stood the test of time in being able to certify that a fair rate of tax is being paid. It should be possible to apply similar rules to companies seeking an exemption from any future higher-rate DST.

The following amendments therefore would need to be made to the next iteration of the UK’s DST.

• The new DST must expressly prohibit companies from directly or indirectly passing on this tax to consumers or users.
• The new DST should apply to product sales for any company falling within its scope which is not able to demonstrate that a fair rate of corporation tax is already being paid. Companies would have to demonstrate this through transparent public reporting of country-by-country financial results and other data.