Public Policy

June 4, 2021

A Taxing Question: does big tech have a target on its back?

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With the UK Government considering whether to lift Covid-19 restrictions on June 21, pressure will increase on Chancellor Rishi Sunak to now treat the economic malady, protect livelihoods and restrict any long-term scarring of the UK economy. With the Office of Budget Responsibility forecasting headline debt topping 100% of GDP for 2021-22, many expect the medicine needed could leave a sour taste in the mouths of taxpayers and Conservative backbenchers.

To assuage fears of tax rises hitting traditional and red wall Conservative voters’ back pockets, could big tech see itself with a target on its back?

The UK is today hosting the G7 Finance Ministers in London ahead of the G7 Leaders’ Summit in Cornwall this time next week. Following calls from US President Joe Biden for a global tax deal, there will be significant political pressure on Sunak to tax digital giants like Microsoft and Apple, and crackdown on big tech tax avoidance.

Today’s talks could mark a new dawn, with big tech held to account like never before. We’re likely to see big tech paying more tax, meaning consumers will pay more for services like Amazon Prime, but local community and businesses may benefit from greater funds for levelling up.

In the Budget earlier this year, Sunak started to chart the course to economic recovery; however, he did so through the prism of a third lockdown in England. Now there is (one hopes) light at the end of the tunnel, there will be increasing focus on the path the Government takes. Sunak is, by all accounts, a traditional, free market Conservative who wants to keep the tax burden low and public finances in a sustainable position. The pandemic forced record rates of Government spending and levels of market intervention never seen from a Conservative Government. Sunak must now walk a tightrope that will not only have significant implications for the UK’s economic recovery, but also for his political ambitions.

Sunak’s big challenges are:

  • How does the Government balance domestic pressures from UK-based businesses with a need to set the right market conditions for Global Britain to attract big business to this country?
  • How does the Government recover revenue to pay down debt and return public finances to a more sustainable footing and square that with a philosophical belief in low taxes and a smaller state?
  • How does the Government balance Conservative support for the free market with a desire to support UK businesses and high streets?

Ultimately, in the game of politics, the impact of Government decisions at the ballot box matters. However, the challenge for Sunak is the historic Conservative gains across the Midlands and the North of England means the Government has to balance the wants – and expectations – of traditional Conservative voters with its new base.

Already, Sunak has signalled he’s prepared to increase taxes, but has done so in a way least likely to be felt directly by voters, by increasing Corporation Tax from 2023. Nevertheless, with record spending levels to be paid back, and Government commitments to level up to be delivered, revenue recovery must start sooner and an uplift in consumer spend won’t be enough.

The UK already has its Digital Services Tax which is focused on taxing revenues linked to UK transactions and customers instead of location. There is increasing pressure from the US to shift away from this model to an internationally agreed solution. The UK is, publicly, open to securing a global agreement on digital taxation, but will want to make sure this isn’t just a mechanism for the US Government to increase its tax revenue from US tech companies, without the companies themselves paying more tax.

As part of this, the US wants a discussion about global corporate tax rates, including setting a minimum floor. The implications of this will be felt more in other jurisdictions such as Ireland, the Netherlands, Luxembourg and Malta where competitive tax frameworks and incentives for large multinationals is a key pillar in domestic economic plans. However, while his language publicly has been more open, in private Sunak may be reticent to lose the freedom to cut Corporation Tax in the future.

While agreement may not be reached today, it will serve as a window into next week’s challenge: how the world’s powerhouses establish the right conditions for a global economic recovery from Covid-19. The economic implications for the UK are significant; the political implications for the Johnson Government, and Rishi Sunak as Chancellor are even greater.

 

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