Big Tech expected to ‘circumvent’ UK digital services tax, MPs warn

The world’s largest tech companies are expected to “circumvent” the British government’s special tax on digital companies before new international rules are implemented, MPs have warned.

In a report published on Tuesday, the House of Commons public accounts committee found that the digital services tax raised £358mn from 18 companies in its first year — 30 per cent more than expected. But it warned the “successful implementation” of the levy in 2020-21 was unlikely to continue.

It said that, since implementation of an international tax deal — set to replace the levy — was likely to be delayed, it expected companies would use “the huge resources and expertise at their disposal to circumvent” the digital services tax.

“While there may be no evidence of active tax avoidance or evasion by businesses to date, this may change if the life of the digital services tax is extended,” the report, which did not name any companies, concluded.

Ministers brought in the new digital services tax in 2020 as a temporary measure to address concerns that tech companies were declaring low profits in the UK by diverting profits made on UK sales to other countries with lower corporate tax rates.

Other countries, such as France, Spain, Italy and Turkey, implemented similar measures. Most, including the UK, have said they would repeal the levy once an OECD agreement, which would allow countries to tax an element of the largest multinationals’ profits where they make their sales, is implemented.

Although the process is progressing at the Paris-based international organisation, there are few signs that the US Congress will ratify any agreement even if the Biden administration were to sign up.

Sarah Olney, the Liberal Democrat MP who led the PAC inquiry, said: “We were very pleased to see [HM Revenue & Customs] finally getting to grips with the realities of taxing multinational corporations . . . But [HMRC] needs to up its game on compliance — especially across jurisdictions — about how the tax will actually operate, over what will probably be years more before a proper international tax is fully operational.”

Neil Ross, associate director of policy at industry group TechUK, rejected the report’s suggestion that businesses would seek to find ways to circumvent the tax as “surprising and unfounded”. He added: “From our perspective, companies are trying to get clarity and information out of HMRC in order to comply. But HMRC was very slow and not effectively resourced.”

But he agreed that the tax was a “second-best option . . . Political attention should be focused on getting the OECD framework agreed.”

The Treasury and HMRC also dismissed the PAC’s warning that companies would circumvent the tax, saying it was relatively easy to operate. Officials said the tax system also had other ways, including the diverted profits tax, to ensure tech giants paid their fair share.

“The digital services tax has proved highly effective at taxing the UK revenues made by online businesses ahead of new international rules,” HMRC said. It added that it had “an extremely strong track record on multinational tax compliance”.