Tech Tax To Boost Global Competition

Philip Hammond risked making himself the most unpopular man in Silicon Valley this week by declaring that technology companies will be forced to pay an additional tax on UK sales.

From 2020, a 2% tax will be charged on revenues of more than £500m a year globally by search engines, social networks and online marketplaces as the Chancellor’s Autumn Budget moved to clamp down on money made in the UK that isn’t fully taxed here.

For too long, tech giants and their accountants have manipulated balance sheets to reflect profits in the most tax-advantageous way. This practice is perfectly legal, although morally questionable, and it has deprived global governments of billions of pounds of tax revenue, notably in the UK where these companies run some of their most profitable entities, as Facebook proved in 2017 when paying £2.58 million in tax on £58m profit, or Google did when it paid just £49 million of tax on revenues of £5.7 billion.

It is necessary

It would be easy for technology companies to see this new regulation as a form of punishment. But, it’s likely that over the long run this measure will turn out to be good for the health of the industry.

As Bloomberg neatly sums up, the tech tax “is both pointless and essential”. Only about £400m will be raised from this measure, but it could be the start of a period of progressive action by global regulators who have watched as technology companies have ballooned to near uncontrollable levels of profit and power.

Despite the size of the beasts he hunts, the Chancellor’s isn’t out to raise funds. He wants to change the world. Only bold action will spur governments around the world into collective action so that they can figure out how to deal with a collection of firms who are in danger of growing too big to regulate.

It isn’t stifling

Those who claim that the tech tax will stifle innovation and progress are wrong on two counts.

First, the tax only targets very large firms who generate very large profits. These companies can afford the tax bill and they are not going to be prevented from innovating by the threat of having to pay a slightly higher, fairer share of tax. The majority of the market will go untouched.

Second, one of the biggest impediments to small company growth is a feeling that, “Amazon or Google or Facebook could do this/build this/solve this 10X faster. So why should we bother?”

The tech giants of today were upstarts in the noughties, but they’ve quickly turned into the kind of anti-competitive monopolies that Roosevelt had to reign in at the turn of the last century. This environment is dangerous and it is why it’s so important that the tech tax – and the international collaboration that hopefully will follow – promotes competition across the industry once again.

For all the “Do No Evil” fuzziness that Google set out with, it is without a doubt now a giant, profit-seeking entity that does all it can to protect itself and the interests of its shareholders. It’s famous for lobbying for its own well-being, even if it’s done at the expense of the global economy or its previously held principles. Google is not alone, but these practises are bad for competition, especially when done by a collection of companies of this size and power.

Global approach required

Hammond’s tech tax is bold and he should be congratulated on being one of the first to make a move in this space. He also inserted the caveat that prior to the tech tax’s rollout in 2020, if a global agreement had been reached in conjunction with the OECD and other G20 members then the UK would park their version of the scheme.

In truth, the UK tech tax is pointless unless other global powers join. Europe must act as one, led by Macron and France, and hope to push the US and China into concerted action too. Of course, isolationist America will fight back as it will feel that a more level tax playing field means that taxes are going elsewhere instead of staying in the US. But other countries should fight back. We can all win.

For too long, consumers outside of the US have been giving up their data to be monetised, so it’s only right that there’s a readdressing of that balance so all our societies benefit. If that isn’t through a tax take, then it should be explored through a rebalancing of competitive values. Hammond’s tech tax is the first step towards this.