A deal agreed by the G7 means that US technology giants will pay less tax in the UK than they do under the existing digital services tax, a think tank has warned.
Although Facebook, Google and Amazon should end up paying more tax in total, the US Treasury will be the main beneficiary. The UK will recover more revenue from its own large multinational companies but less from the tech giants than it would do otherwise under its own digital services tax.
Tax Watch, which conducted the analysis, said that the final figure could be half as much.
The new global tax regime was agreed by G7 finance ministers in London over the weekend. Under the new system, G7 countries will impose a minimum tax rate of 15 per cent to discourage companies from moving profits offshore to tax havens.
Tax Watch said that this part of the deal would do the heavy lifting in raising tax revenue for the UK government.
The other part of the deal, known as Pillar One, aims to tackle large companies that fail to pay tax in the countries where they make their sales. This portion of the deal will target large technology companies that book their profits outside the UK.
Britain, along with several other European countries, introduced a digital services tax last year to combat the problem. It imposes a 2 per cent tax rate on revenues generated by UK users of large social networks, search engines and online marketplaces. The Treasury hoped that it would raise £500 million a year.
Under the new deal G7 leaders have agreed to US demands to scrap the tax. Digital services taxes will be replaced with a tax on businesses with profit margins of at least 10 per cent. They will be be required to pay 20 per cent of profits above the 10 per cent margin in the countries where they make their sales.
Tax Watch said that this would result in less tax being collected from technology companies that once fell under the remit of the digital services tax. Google is the major beneficiary — it stands to pay £158.6 million less in UK tax — while Facebook will pay £22.2 million less and eBay £11.9 million less.
Amazon’s profit margin of 7 to 8 per cent means that it will not fall under the scope of Pillar One but ministers are expected to apply segmentation clauses so that more profitable parts of Amazon’s business fall into scope. Under the Digital Services Tax, the Treasury would have collected £50.1 million from Amazon Marketplace. This will fall to £10.2 million under Pillar One, meaning that Amazon will pay about £40 million less tax in the UK.
Tax Watch said: “Our analysis shows that for every company that is subject to the DST, the Pillar One proposals would lead to substantially less money being raised in taxation in the UK. If the UK therefore goes forward with the removal of the DST, as the G7 communiqué strongly suggests it will, the package of reforms will lead to a net loss of tax in the UK from eBay, Amazon, Google and Facebook.”
It added: “While not the only companies likely to see a UK tax reduction as a result of the removal of the DST, these four are almost certainly the largest. Between them, based on 2019 revenues, these multinationals look set to pay £232.5 million less in tax than they would under the DST.”