Taxing digital services suggests the government is serious about sovereignty

On 1 April, the UK’s new digital services tax (DST) came into effect. Announced in the 2018 budget and legislated for in the Finance Bill 2020, the tax applies to businesses providing social media, search engine or online marketplace services. If such a business turns over more than £500m globally and more than £25m in Britain, its UK-derived revenues will be subject to a 2% tax. Even though the tax theoretically applies to UK and foreign businesses alike, the turnover thresholds are in practice likely to be met only by a small number of multinational companies. Those companies, including Google, Amazon and Facebook, are overwhelmingly concentrated in the US.

Setting out the DST, the then chancellor Philip Hammond said it would address the unfairness of tech companies generating “substantial value in the UK without paying tax here in respect of that business”. The policy has been largely supported by the opposition. The same, however, cannot be said those powerful US companies likely to be hit – nor the US politicians who are no doubt on the end of some intense lobbying campaigns.

The US has warned that the UK’s digital services tax could scupper a trade deal

The US government has repeatedly protested against the UK’s decision to introduce the DST. It asserts that it is unfair and discriminatory, and has made threats of retaliation against the UK should it go ahead: Steven Mnuchin, the US Treasury secretary, said in January 2020 that “if people want to just arbitrarily put taxes on our digital companies, we will consider arbitrarily putting taxes on car companies”. Similar threats to France’s food and wine exports forced the French government to delay introducing its equivalent of the DST in January.

Although the US administration – no doubt distracted by the coronavirus crisis – has not repeated these threats recently, it seems likely that it will eventually make its displeasure known. Even if it chooses not to retaliate with tariffs, as Mnuchin suggested, it is hard to see a UK–US trade deal making progress with the tax in place. Opposition to the DST in Washington is widespread and bipartisan: Ron Wyden, a Democratic senator, said in July 2019 that “a trade agreement with the United States and the UK… will not happen with your digital services tax. Period.”

A tax on digital services could be a useful bargaining chip – but this doesn’t seem to be the government’s intention

The UK could ultimately negotiate the DST away in trade talks with the US, securing something it wants in return. Raising a new trade barrier so as to have something to give in exchange for a concession from the other side is an old negotiator’s tactic. But the rhetoric being used by UK ministers, including the trade secretary, Liz Truss, suggests that the tax is here to stay: Truss has said that UK tax policy, including the DST, was “not a matter for the US, it’s not a matter for the EU, it’s not a matter for anybody else, and we will make the decisions that are right for Britain”.

This is not an aberration. In fact, it fits well with this government’s overall narrative on trade. The government said in its objectives for trade negotiations with the EU that it would never negotiate “any arrangement in which the UK does not have control of its own laws and political life”. David Frost, the prime minister’s chief Brexit negotiator, said in a speech on 17 February, that the government expected that any short-term losses arising from a more distant trading relationship with the EU would “be overwhelmed rapidly by the huge gains of having [its] own policy regimes”.

With the introduction of the DST, the government has come down on the side of domestic autonomy over international trade in its relationship with the US, as well as the EU. Even if the government does not believe the DST will ultimately be fatal to its chances of signing a US trade deal, it will undoubtedly make it harder to achieve. At least in this instance, the government is clearly willing to take a hit on trade in order to exercise its sovereign right to regulate domestically.