Digital services tax: introduction

Part of Finance Bill – in a Public Bill Committee at 11:45 am on 11th June 2020.

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Photo of Bridget Phillipson Bridget Phillipson Shadow Chief Secretary to the Treasury 11:45 am, 11th June 2020

My hon. Friend makes an important point. That is one of many concerns raised by stakeholders, and an issue that I will be raising further with the Financial Secretary during the course of my contribution. As the he outlined, the measure does not capture media streaming services either, and I intend to say a bit more about that in due course.

The broad campaigning support that we have seen right across the House on issues of tax transparency, led primarily by my right hon. Friend the Member for Barking but with considerable support from Government Back Benchers, demonstrates the appetite both within this House and outside for greater transparency in this area. Tremendous work has been done by the all-party parliamentary group and by the Public Accounts Committee, led previously by my right hon. Friend the Member for Barking and subsequently by my hon. Friend Meg Hillier, which has continued to press the need for greater transparency in this area. It wants the Government to act, but it also recognises the need for greater multilateral action. I know the Financial Secretary touched on that point and I will come back to it later.

The Opposition understand the difficulties with multilateral action, but we think that the Government should provide a greater degree of leadership in seeking to resolve the problem. Another reason why the yield as outlined might be so low is the rate at which it is being set: it is among the lowest in Europe. I invite the Financial Secretary to explain why the Government have adopted such a cautious approach when other countries are going further. How did he arrive at the figure? How did he and the Government determine the level of the tax? What assessment was made not just of the yield and the difficulties with determining it, but of whether it is an appropriate level? Have other stakeholders and groups made representations on the level at which the tax has been set?

The modest nature of the measure becomes clear when we consider what some of the tech giants might actually have to pay under the tax. The Minister may well be aware of the research by TaxWatch UK, which estimates that Facebook would face an increased tax bill of £39 million despite estimated UK venues of almost £2.3 billion. Google would pay slightly more: around £168 million, based on estimated UK revenues of £9.3 billion.

Beyond the small impact on the companies to which the tax applies, there is the question of which companies will not be affected by the tax. That comes to the point made by my hon. Friend the Member for Erith and Thamesmead. Many digital businesses such as Amazon, which blend their activities, will be unaffected by the measure outlined by the Minister; nor, as TaxWatch UK has illustrated, will it apply to Apple’s hardware business, Microsoft or Cisco Systems, none of which involve social media platforms, search engines or online market places.

As I said earlier, my right hon. Friend the Member for Barking has done so much work in this area. I am aware that she pressed the Financial Secretary earlier this year to extend the scope of the digital services tax to include streaming services such as Netflix, which are not included in the measure, and he set out some of the Government’s concerns about broadening its scope. I want to provide a bit of background on the operations of Netflix, on which many of us have come to rely in a much greater way during the lockdown period. Many online streaming services have no doubt seen a real boost at a time when we are all trying to find ways to spend many an hour and entertain our children in the absence of any form of proper childcare.

Netflix’s estimated revenues from UK subscribers was £860 million in 2018, based on analysis from TaxWatch UK, which provides an analysis of Netflix’s corporate structure showing that the company has implemented a similar tax avoidance structure to those used by many other multinational companies operating in the digital sphere. Revenues are not collected in the country where they are made; instead, customers are charged from an offshore company, and profits are then moved from the hub company to a tax haven through the use of an intra-company transaction. Netflix’s historically low profit margins mean that the scale of any tax avoidance will be much lower than that of many other well-known companies that employ similar tactics. TaxWatch UK has argued that it is relatively easy to calculate the revenue of Netflix in the UK: there are surveys of TV usage that tell us how many subscribers it has in the UK, and Netflix publishes data on average revenue per subscriber, which is something that I imagine has grown considerably during this time.

That returns us to the issue of fairness. Despite receiving support from Government, many high street businesses have struggled and will continue to struggle for a prolonged period, while other companies have potentially seen a big increase in their revenues during the crisis. The Opposition urge the Government to consider whether the measure is adequate. As argued by my right hon. Friend the Member for Barking, extending the scope of the tax could feasibly bring other streaming platforms, such as video game streaming platforms, under the ambit of the tax. That would improve its takings and ensure that all companies pay their fair share.

The pattern of profit shifting displayed by Netflix, which I just outlined, reflects practices adopted by others. It is clear that the current system for taxing streaming services is not working. The proposed measure would go at least some way to resolving this, but it is not adequate.

I am aware of the Financial Secretary’s response earlier this year to my right hon. Friend the Member for Barking, disputing the practicability of widening the scope of the tax, but I urge him to look again at the issue, or at the very least to consider other means at the Government’s disposal to ensure that all companies pay an appropriate amount of tax. We will discuss the scope and the yield later when debating Opposition amendments, but I urge him to consider how we can be confident that this measure is working as intended—not only whether it is deriving the income that we need in order to provide support for our frontline services at this difficult time for the country, but whether the digital services tax is operating as it should.

I will also highlight some of the technical issues relating to clauses 38 to 44. Clause 39 indicates that revenue should be apportioned on a just and reasonable basis when not wholly attributable to a digital services activity. Does the Minister accept that there may be a risk in taking businesses at their word here? There may well be some issues in how that is applied, and I would be grateful if he could offer some reassurance in this area. Asking businesses to apportion revenue on a just and reasonable basis may lead them to structure their operations or disaggregate their costs in a certain way to avoid higher liabilities. In the absence of public country-by-country reporting measures to create full transparency, oversight of this will be essential. Can the Minister confirm what will be done to ensure that this has been calculated in a fair and open manner?

A related point is capacity within HMRC. As we have all acknowledged in earlier discussions on the Bill, HMRC and Treasury staff are doing tremendous work at this difficult time for our country, and we all commend them for their dedication and hard work. I imagine it must be a challenging environment in which to work, responding quickly to changes in policy and with the need to support businesses and taxpayers alike, but given the challenges faced, can the Minister assure us that HMRC will have the resources and staffing it needs to make sure that this tax is being applied properly and that revenues are being secured? Some stakeholders have suggested putting in place a dedicated digital services tax team, and I wonder what consideration the Minister and officials have given to that.

Since the legislation was first announced and consulted on, several stakeholders expressed throughout the consultation period concerns around whether the definitions the Government use in these clauses are clear enough and watertight. For instance, there is uncertainty around whether online gambling platforms will fall under the scope of this tax, as set out by the Chartered Institute of Taxation. I appreciate that the legislation has been modified since it was first announced, but I would be grateful if the Minister could clarify the position.

On Clause 43, concerns have been expressed about the difficulty in identifying a “UK user”. The use of virtual private networks presents an obvious difficulty in this regard. The process of monitoring users may also raise concerns around GDPR compliance. I will be grateful if the Minister could set out whether that is the case, and whether there may be difficulties in this area.

I will now touch on the international context in which this measure has been put forward, drawing in part on the Minister’s remarks on the need for both UK action but also global action, as companies work across country boundaries and jurisdictions. The international tax system is fundamentally not fit for purpose: it has not kept pace with the changing nature of technology and many of the changes that we have seen in our economy and the global economy. It was modelled on the trade in goods, rather than services. The challenge of how we respond to the digitisation of the global economy continues, and goes far beyond this measure and other measures that the Government are considering, but the OECD has been pressing on the issue for years, as the Minister acknowledged.

It is regrettable that no multilateral consensus has yet been forged. Opposition Members are clear that a multilateral solution is the best possible outcome, but it requires leadership—something, it has to be said, that has been sorely lacking in recent years. I hope we will see much greater action from the Government in pressing the case multilaterally, demonstrating international leadership, so that we can see a fairer solution right across the board. In the absence of such a consensus, a unilateral approach was always inevitable. It remains, of course, a second-best option, and the Minister will know that it is not one that comes without risks. We have seen just this week the US trade representative launch an investigation into digital services taxes, including the UK’s. The Chartered Institute of Taxation has also highlighted the risks of provoking retaliation, which could affect businesses based in Britain, as we have seen in the US response to the French digital services tax, or of copycat measures, which may be less narrowly targeted.

Earlier this year, at the World Economic Forum, US Treasury Secretary Steve Mnuchin suggested that the US might retaliate with a tariff on UK car exports if the digital services tax discriminated against US multinationals. I know that the Government have previously said that they would not be deterred by such tactics, but I would be grateful if the Minister could reiterate here today that this continues to be the case. Perhaps he could also say a bit more about what we can expect to see in multilateral action. What meetings are planned, and what do the Government intend to do in leading the world in this area? I would also like to hear reassurance that the Government will not use this measure as a trading chip in any future trade negotiations with the US.