Welcome to the shape-shifting world of big tech taxes
Axing the Digital Services Tax may be the price Britain pays for a trade deal with the US, but that doesn’t mean we’ve seen the back of tech taxes, says Tim Sarson
Just a few days ago, Rachel Reeves was strolling in, to paraphrase Flanders and Swan, the geopolitical zoo that is Washington DC, attempting to get some sort of deal with the big cats of the new US administration, including her US Treasury counterpart Scott Bessent. Among the fiscal hunting trophies on the wall above his bed, it’s possible that in due course you may find the UK’s Digital Services Tax (DST). His government has been laying down the law about the habits of European tax authorities, and marked down DSTs for extinction.
DST is a highly exclusive tax (exclusive because precious few companies actually pay it), introduced to great fanfare in 2015 by former Chancellor George Osborne and calculated as a percentage of UK digital revenues made on the largest global social media platforms and online marketplaces. It brought the exchequer just £670m in 2023/24. Yet HM Treasury clings to it and the Americans get cross about it out of all proportion to its actual scale. But why?
DST is one of a herd of new similar looking taxes that have mounted a great migration across the world’s fiscal regimes since the dawn of the internet. They are mostly what I would call pay-to-play taxes, that is, levies by governments on tech giants for the privilege of servicing their attractive consumer market. Before big tech, they managed that job with VAT and corporate income tax and, of course, good old import tariffs.
The internet era business model
But the internet era business model whereby you or I receive a service for free and the platform gets its money from advertisers really flummoxed policymakers. It gave birth to one of the big ideas of the BEPS project – the very European notion that all the personal data consumers are willingly giving away for free is actually highly valuable. Mining it is therefore akin to extracting minerals from sovereign territory and should come at a cost.
So now we have these DSTs. Not just in Britain. There are various species of DST or DST-adjacent taxes out there. Until last month India had an ‘equalisation levy’ on payments abroad for advertising services, which it has just agreed to drop to improve trade relations with the USA. Look out for some other revenue raiser to pop up in its place. Most European countries either have a DST in the pipeline, or have threatened to introduce one if their preferred solution to market-based taxation, BEPS Pillar 1, fails to come about. Which it almost certainly will, because the US has pulled out of this and other global tax agreements.
And these types of taxes are shapeshifters. They come and go, and they’re hard to pin down. What exactly are they? A corporation tax? Not a corporation tax. A VAT? Seems unlikely. Could they be…a sin tax? The Ugandans certainly thought so when they imposed their five per cent social media levy to ‘stop gossip’ (since repealed after major protests). Neighbouring Kenya has both a DST and a digital excise tax. And in Tanzania: the innovative ‘blogger licence fee’, where the one paying to play is no longer the big multinational but the humble influencer.
None of these taxes raise much money. All of them are high profile and controversial. They’re getting their day in the sun in 2025 as part of the US-global trade issue. But I doubt they are going anywhere. When ideas of tax fairness mix with the social imperative to do something about social media, and ever-tightening fiscal budgets, governments are going to be tempted.
While voters might like the idea of them because it feels like they are taxing internet giants, the cost of most sales based taxes ends up with the consumer somewhere down the line.
In the current form I think they’re a bit silly. They are based on an idea about value creation and data that doesn’t really stand up to scrutiny. They add yet another layer of complexity to systems. By nature they either burden everyone and stifle innovation, or are so narrow in application that they become irrelevant. While voters might like the idea of them because it feels like they are taxing internet giants, the cost of most sales based taxes ends up with the consumer somewhere down the line. But I don’t think even current US and global trade retaliations will cool the ardour for digital levies. They’ll just shape shift again, to look less like they’re targeted at US multinationals. I don’t believe they’re as endangered a species as they might appear.
Tim Sarson is head of tax policy at KPMG