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Budget: Tech tax contribution could be higher than forecasts

Investors in US tech giants should proceed with caution
October 31, 2018

Investors may have been disappointed by third-quarter numbers from the US technology giants, but UK tax collectors are likely to have been rubbing their hands with glee. Under Philip Hammond’s new tech tax, it’s the double-digit revenue growth reported at companies such as Facebook (US:FB.), Google-owner Alphabet (US:GOOGL) and Netflix (US:NFLX) that will be taxed rather than their characteristically lacklustre profits.

The proposal comes as regulators in Europe continue to grapple with plans to overhaul corporate tax laws, which have long been seen to favour digital companies. The UK – whose tax laws were written in 1965, 20 years before the arrival of the internet – is tired of waiting. Under the new scheme, technology giants that generate at least £500m of global revenue will be forced to pay a 2 per cent tax on the sales they generate in the UK. Mr Hammond said: “It is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here.”

But the extent of that value is hard to judge. Apple (US:AAPL), Netflix and Facebook don’t provide a geographical breakdown of revenue generation and Google stopped reporting separate UK figures in 2016. It is also tough to tell exactly which revenues will be taxed. Amazon (US:AMZN) made $11.4bn (£8.9bn) of sales in the UK in 2017, but didn’t split out whether they came from physical stores, the online marketplace, or its web hosting services. Each division falls under a separate remit and is likely to be taxed differently.

The Treasury forecasts that the tax will generate £440m by 2023, and this is expected to impact at least 30 companies – meaning that, on average, each company will take an additional £14.6m hit on profits. But estimates based on the annual numbers of some US tech companies indicate that it could be far higher. Amazon estimates that half of its UK revenue comes from its marketplace (the division that brokers at Shore Capital think will be taxed), which suggests its annual contribution alone will be $113m. Ebay (US:EBAY), which makes roughly 80 per cent of its revenues from its marketplace and generated $1.4bn of UK sales in 2017, could have to cough up $22m.