With the UK already testing the strain on its special relationship with the US following the Huawei decision, the introduction of a 2% digital sales tax is hardly going to help matters.
Although the introduction of such a tax has been in the works for some time, the timing could be better. It will certainly aid the UK Government, just as it announces expensive support measures for SMEs in the 2020 Budget statement, but the easily irritated US President might have a thing or two to say in response.
The new digital sales tax was not mentioned during Chancellor Rishi Sunak statements today, but there was plenty of reason for the UK Government to want to secure additional tax revenues. A £5 billion emergency fund will be offered to the NHS, a £500 million hardship fund will be created for councils in England and business rates in England will be abolished for firms in the retail, leisure and hospitality sectors.
The two are of course not related, the UK would have most likely pursued the digital sales without the extra expense associated with the coronavirus outbreak. From April 1, firms where revenues exceed £500 million worldwide, £25 million of which would have to derive from the UK, and operate either a social media, search engine or online marketplace service will be subject to the 2% digital sales tax.
And while the US Government might protest to such a prospect, it is of course very fair and reasonable. Tax laws were created for the analogue era, meaning many digital businesses today can bend around the rules, derive value from their interaction and engagement with a user base but shifting tax responsibilities to a more favourable market. It leaves some Governments out of pocket for no other reason than legal loopholes and creative accounts finding work arounds.
While it is perfectly logical for a company to pay taxes in the country where it creates value and profit for itself, President Donald Trump has been a very vocal opponent. According to the Commander in Chief, this is an attempt to raid the successful US economy. When you add the digital sales tax to the Supply Chain Review conclusion, the UK/US trade talks might be somewhat of a tense occasion.
The last time UK and US representatives faced-off over the concept of a digital sales tax at the World Economic Forum in Davos, Steven Mnuchin, the US of the Treasury, suggested it was a discriminatory tax directed towards the digital fortunes of the US. Mnuchin even went as far as to suggest there would be a retaliation from the US.
The UK is of course not alone in its pursuit of a fair and reasonable tax system, designed for the 21st century. France has introduced its own 3% digital sales tax, as has Italy. In response, the US has been targeting French cheese and fashion for trade tariffs, while it would surprise few to see something similar levied towards the Italians.
Although Silicon Valley will feel the pinch of the new sales tax more than anyone else, perhaps the US politicians need to appreciate this is not an act of aggression towards the country. It the statements of opposition, the US feels it is a victim of European bureaucratic oppression, but it is not. This is not a tax directed towards US digital companies, but towards the tax dodgers in the digital economy, some of whom are headquartered in the US.
These companies are a victim of their own success and shadiness. If the tax avoidance was not done to such an extreme level, these governments probably wouldn’t feel the need to pursue so aggressively. Instead, these companies, who could be based anywhere around the world, wanted to have their cake and eat it. That’s not how the real-world works, eventually it catches up, just like it has done so here.