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Budget 2018: digital tax a lurch towards ‘protectionism’

Budget 2018: digital tax a lurch towards ‘protectionism’

The government’s decision to introduce a digital services tax is a lurch towards protectionism and is unlikely to hurt the big tech firms, according to fund managers and analysts.

Under the plans announced in the Budget, ‘established tech giants’ will be forced to pay 2% tax on the sales they generate in the UK.

Aimed only at the big players, it will apply to tech companies which generate £500 million in revenue on the business lines in the scope of the tax, with the proposal set to raise £400 million a year when it comes into effect in April 2020.

Companies such as Facebook and Google have been criticised for the amount of tax they pay in the UK.

While chancellor Philip Hammond has been widely praised for the move, he has also drawn criticism for the UK’s seemingly go-it-alone approach.

Robert Lloyd, a fund manager at Blue Whale Capital, thinks it was ‘always likely’ that the tech giants would be hit with a sales tax in Europe at some point, but slammed the UK’s protectionist stance.

He said: ‘Europe’s hopeless stagnation in productivity and innovation in the era of digitalisation has meant they have fallen way behind the US and China in this area over the last 10 years to the point where it’s now very difficult for them to compete in a free, open market.

‘Therefore, the last option for Europe is to resort to protectionism, which is what the UK has done.’

Lloyd added that the UK should instead be focusing on skilling up its workforce in new areas of technology and improving productivity, asking the big tech companies to invest to help it achieve that goal.

He said: ‘You only need to observe Google’s Campus London, which is a centre for supporting UK start-ups, Facebook’s recent investment in a new London hub creating 800 jobs and the new Apple campus in Battersea to understand that these companies are willing to put money and resources into the UK.

‘But this may change if protectionism is to become the policy of the UK government.’

Tim Walford-Fitzgerald, a private client partner at H W Fisher & Company, says that a misconception which has arisen from the tax announcement is that Amazon will be one of the firms targeted in the same way as Facebook and Google.

In the Budget announcement, Hammond said the move would not be a ‘tax on online sales of goods’ for consumers, and Walford-Fitzgerald argues it would be difficult to determine which part of Amazon’s revenues would come under the tax.

He said the fact the tax will be a digital services tax, as opposed to a digital sales tax, means that unlike the other tech giants, a lot of Amazon’s revenues will not come under the proposal. In any case, its warehouses in the UK are not considered in tax treaties as ‘permanent establishments’.

Walford-Fitzgerald said: ‘Obviously Amazon is also a retailer, so it won’t be caught in the same way. When you buy something from Amazon [in the UK], you get that friendly email back from Amazon EU Sarl Luxembourg saying thank you for your purchase.

‘The UK/Luxembourg double tax treaty says that companies will be taxed in the UK if they’ve got a permanent establishment there, but a lot of Amazon’s business in the UK comes out of its storage facilities and delivery centres, which aren’t considered in the treaty as a permanent establishment.’

Regardless of who or what is in scope, the tax is unlikely to hurt the tech giants in any material way over the short to medium term.

It therefore does not change the investment case for Faang stocks, according to Ben Barringer, an equity analyst at Quilter Cheviot.

As most of the global tech firms only break down their revenues into US and non-US, he said it is difficult to get a sense of the exact impact any UK tax could have.

Barringer said: ‘A sensible estimate of UK exposure for companies like Alphabet (Google), Amazon and Facebook might be between 5-10% of revenues, however.

‘So while the UK is more important than many other non-US markets, it still only accounts for a small percentage of their revenues and many technology companies are already domiciled in low tax jurisdictions, like Ireland or Luxembourg.’

While Hammond’s announcement is a step further than other EU states, Barringer added that there have been wider moves across Europe to tax the digital economy.

The European Commission is proposing an interim tax on tech firms ahead of longer term plans for EU members to tax tech giants on revenues made in their territories.

But Barringer said it is not an immediate concern to the tech giants, and added: ‘As seen in recent days, companies like Alphabet and Amazon continue to generate strong earnings growth and benefit from structural changes in the economy.

‘It’s these areas which investors should focus on, rather than changes to tax regimes which are unlikely to have a serious impact on profits for several years.’

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