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What is the Facebook Tax?

The UK Chancellor looks set to drop the Digital Services Tax on large technology companies.  The tax, also known as the Facebook Tax, was introduced in April 2020 and is designed to tax companies who provide a digital service in the UK.

It is rumoured Rishi Sunak believes the Tax which is expected to generate £500 million a year, is only a fraction of what’s required to plug the national debt caused by the COVID epidemic.  This is estimated to be hundreds of billions of pounds.

Impact of the Facebook Tax on a Potential UK and US Trade Deal

The Tax is considered to be a barrier to US/UK Trade Talks with the US Government claiming it unfairly targets American tech companies.  Members of the US Senate Committee have asked the UK to ‘reconsider the punitive action against its ally’.  Even President Trump’s administration have laid threats to impose tariffs on UK car exports.

With the risk of a no-deal Brexit looming, the importance of a trade deal with the US becomes more and more crucial.

Although £500 million is not to be sniffed at, it may be considered to be more trouble than it’s worth.  Here we look at what it’s all about.

When was the Digitial Services Tax introduced?

The Digital Services Tax was announced in the 2018 Budget and was followed up by consultation in February 2019.  The effective launch date of the Tax applies to revenue earned from 1 April 2020.

The Tax is applied to large companies in the digital service industry.   This includes large companies such as Facebook, Google, Apple, IBM and Amazon.  All of these are American giants with Headquarters in the USA.  It doesn’t apply to European digital companies such as Spotify and Monzo because they do not operate ‘search engines, social media services and online marketplaces.’

One of the biggest challenges facing tax authorities is taxing companies that provide digital services, but are physically located in another country.  The combination of this logistical challenge, tax loopholes and highly-skilled accountants see large companies pay very little corporation tax.  The issue is made worse when it’s difficult to calculate how much to tax a company that hosts digital services rather than selling a tangible product, which a government can charge VAT for.

How does the Digital Services Tax Work in Practice?

The tax is only applied to companies who provide a digital service and have global sales that exceed £500 million.  The companies UK sales must also exceed £25 million.  The first £25 million is classed as a non-taxable allowance and therefore doesn’t incur tax.  Any sales above the £25 million threshold is taxed at 2%.  The sales or transactions must be generated by a UK citizen or user.  It will be applied when one of the parties to a transaction on an online marketplace is a UK user.

Does the Facebook Tax unfairly target American Companies?

The vast majority of the companies being targeted are American, such is the dominance in the Tech Industry of American based organisations.  The tax is not aimed at any specific country, and is certainly not a tax aimed at American businesses.  Such is the success of the Silicon Valley, a large number of digital service companies come from this area.

Is the Digital Services Tax Justified?

There are arguments for and against the Tax.  Many countries believe the tax is fair, especially considering the first £25 million of sales is non-taxable.  A large organisation that produces 90% of its revenue outside of the UK would see most of this income untouched by the HMRC.  Furthermore, the tax should not impede technical developments and taxes are only charged after a sizeable profit has been earned.

Digital Services are reliant upon usage by the population, who in turn rely on services funded by the UK Government.  These include education, health and transport which these taxes go towards funding.  Any business conducted in the UK, relies on a stable economy and ecosystem funded directly from taxes.  In addition, a 2% Tax Rate is a fair amount when compared with the 20% rate associated with Corporation Tax in the UK.

It is argued however that the Digital giants may pass these additional costs on to customers.  Amazon for example, have announced it will increase seller fees from September 2020 after unsuccessful talks with the UK Government.

So what happens next?

It remains to be seen what the Chancellor will do.  As alluded to at the start of the article, the UK Government will need to take into the bigger picture.  A strong US Trade Deal is a priority for the UK Government, especially factoring in a no-deal Brexit and the full impact of COVID yet to be realised.

A spokesperson for the Treasury claimed, ‘We’ve been clear it’s a temporary tax that will be removed once an appropriate global solution is in place – and we continue to work with our international partners to reach that goal.’ The Facebook Tax will a discussion point for some months to come.