By Islay Aitchison, Researcher at the TaxPayers’ Alliance
Last month, during a panel discussion at the World Economic Forum at Davos, the chancellor confirmed the government has opted to appease the anti-enterprise forces that make up so much of the British and global elite. The Digital Services Tax (DST) will come into force in April 2020.
The DST applies to businesses providing a social media platform, search engine or online marketplace to British users. It’s a cash-grab dressed up as a boost for the high street. However, far from bringing life back to local shopping centres, all the DST will achieve is to increase in the cost of living for ordinary taxpayers, chill investment in Britain’s tech industry and put other sectors at risk of international tariffs.
Despite its limited scope — businesses only become liable to pay once they have a global revenue of over £500m — the DST is fundamentally a punishment for success in an increasingly-important sector. It makes Britain a less appealing place to invest because even small firms will take the long-term cost-benefit analysis of the British tax regime into account. More broadly, the introduction of the DST damages the country’s reputation as a potentially lucrative place to invest in tech. Through the DST, the government is exhibiting its willingness to undermine tech productivity to score political points. There is a perception that certain firms are doing too well and the government seems to be trying to harness some of that perception without considering the costs.
The government ought to think carefully of the reciprocal taxes the DST could provoke. When France proposed a similar tax, the United States threatened to place tariffs on French products such as wine, cheese and cosmetics. Britain is facing similar treatment. After Sajid Javid confirmed that the DST would go ahead, Steven Mnuchin, the United States treasury secretary, said: “if people want to arbitrarily put taxes on our digital companies, we’ll consider arbitrarily putting taxes on their car companies.” If the government’s intention is, as the Prime Minister suggested, for the DST to force tech giants to “pay a fair contribution”, it’s miscalculated. The DST may ultimately harm all kinds of British export sectors, big and small, putting strain on the economy, hurting businesses and the typical taxpayer.
A major reason for the perception digital firms are not paying enough tax is the inadequacy of corporation tax in the modern globalised economy. It has become steadily more difficult to accurately attribute and therefore tax value creation due to the increasingly globalised and information-driven economy, especially as it applies to international and digitally-focused companies. This is impacting corporation tax receipts and is likely one of the factors pushing the government towards the introduction of the DST.
However, there is no reason to believe that the Digital Services Tax will, as claimed by the government, “level the playing field” between online retailers and brick and mortar stores, saving Britain’s high streets. Certainly, smaller shops are struggling to compete against both retailers like Tesco and major online stores. But the reason for this is not some special super-advantage that being online brings. Large retailers, in whatever form they take, are able to offer consumers better value products. Smaller shops have been struggling relatively for decades, long before the rise of the likes of Amazon. On top of this competitive disadvantage, many of Britain’s high streets stores are pushed into charging more by corporation tax and business rates. If the government really wants to assist the high street, then it should rule out rises in business rates and alter the rating system to exempt the value of buildings and improvements. We have also outlined a possible change whereby business rates would change relative to the rental value of businesses. From a government perspective, helping the high street by slashing business rates also has the added bonus of being hugely popular, as our polling last year highlighted.
However, consumers aren’t only factoring in price — they’re concerned about convenience. Unlike browsing online, high street patronage is tedious and time-consuming. Increasingly, there are fewer and worse options available. A principal cause of this isn’t an unfair tax regime, but burdensome over-regulation by local councils and direction from central government. Accordingly, the DST will not stop the waning of the high street. Better regulation and more innovation are what the high street needs.
While the government may promise a certain outcome, the market is ultimately driven by consumer buying habits. Target taxes like the DST don’t tend to have the impact governments campaign on, because they ignore the fact that no tax exists in a vacuum, and the cost is always passed on to customers.
In the end, France pulled its “GAFA” (Google, Apple, Facebook, Amazon) tax and agreed to hold fire until an international agreement could be reached. As a result, other French industries remained safe from retaliation by the United States. While, regrettably, an international agreement on tax for large tech companies is probably inevitable, there’s no reason for Britain to go ahead with the DST alone. The grim reality is that Britain is already struggling to compete, with only eight of the top 200 digital firms hailing from the United Kingdom. Logic leads to one clear conclusion: the government needs to stop interfering.