In a recent Policy Brief, we dissected the European Union’s proposals to impose illegal and discriminatory digital taxes, designed to hit US multinational technology companies such as Facebook, Google, Amazon, and others. Faced with fiscal woes, UK Chancellor of the Exchequer Philip Hammond has now jumped the gun with a 2 percent tax on digital revenues in his newly announced budget. The sole redeeming feature of the UK proposal is that it would not take effect until April 1, 2020, giving the United States more than a year to mount an effective counter attack.
Hammond’s case for the tax rehearses populist themes: The tech firms are big and prosperous, they derive “substantial value” from operating in the UK, yet they don’t pay much tax to HM Revenue and Customs. But the proposed tax on digital revenue conflicts with established constraints on the reach of national taxes, detailed in our Policy Brief:
- It discriminates against large US tech firms, via the high global revenue threshold of £500 million before the tax is imposed (only tech firms with global revenues of at least £500 million plus UK revenues of at least £25 million will have to pay the tax). The £500 million threshold conflicts with the EU’s national treatment obligation in the WTO General Agreement on Trade in Services (GATS). After Hammond’s announcement, US business groups vowed to resist the proposed tax citing this very conflict with GATS.
- Thanks to de facto discrimination, the tax essentially amounts to a tariff, in conflict with the 1998 WTO Declaration on Global Electronic Commerce (since renewed), which rules out customs duties on electronic commerce.
- The tax base will be some measure of global revenue attributed to UK website users. Since viewers don’t pay anything to tech firms, the attribution of advertising and other revenues (perhaps paid by firms in New York or Paris) to the UK will be arbitrary.
Applying Hammond’s justifications, if it wished, the United States could tax the global revenues of British luxury car and engine manufacturers (Rolls Royce, Jaguar) or British travel agencies (Thomas Cook and others).
Rather than emulating the UK’s ill-considered proposal, the US Treasury and the US Trade Representative should mount a vigorous objection. The UK digital tax alone would not do major damage to US tech firms, but if allowed to stand, other countries will emulate it. The result would be a significant loss of US tax revenues and a major erosion of shareholder value. As explained in our Policy Brief, at least five responses are available to the United States:
- Bring a case in the WTO, but at best the resolution would take 18 months, assuming that US objections to the functioning of the Dispute Settlement Body are settled.
- Condition US-UK (or US-EU) trade negotiations on dropping the tax proposal.
- Condition an end to US “national security” tariffs on steel, aluminum, and possibly autos and other products to elimination of digital taxes.
- Open a Section 301 investigation citing the “unreasonable, discriminatory, or unjustifiable” nature of the tax. Such a unilateral response could lead to fresh trade retaliations.
- Invoke Section 891 of the US Internal Revenue Code and impose double taxation on income earned by British firms and individuals from US sources.
The Trump administration has tabled multiple complaints, of doubtful standing, against the European Union and other trading partners. But the proposed digital taxes are a genuine grievance. They should be forcefully resisted.