Writing to the Government on Tax

On Friday, 4th December 2020, Ethical Consumer made a submission to the Treasury Select Committee's inquiry into ‘Tax after Coronavirus’. Sounds like a mouthful, right? Well, don’t worry, we will explain exactly what all this means.

What is a select committee?

A select committee usually consists of 11 members who oversee the work of government departments or agencies. The Treasury Select Committee examines the policy of the Treasury and has the power to make policy recommendations based on any evidence they have gathered.

Up to the beginning of December 2020, the Treasury Select Committee on Tax after Coronavirus was gathering evidence from organisations and members of the public, with one of their stated aims being to determine “whether there is a role for windfall taxes in the post-coronavirus world.”

Ethical Consumer used this opportunity to tell them about our new campaign for a 10% Digital Services Tax on the Tech Giants (including Google, Amazon, Facebook, Microsoft, Apple and Netflix) to cover the estimated £300bn cost of the Covid-19 pandemic so far.

What further impacts will the coronavirus pandemic have on our tax base?

This article shows some of the detail that we submitted, but we have updated some figures for the time of writing (January 2021).

Currently, the Covid-19 crisis has had a detrimental impact on the UK tax base, due to large swathes of the economy having to shut down during the three lockdowns and not fully recovering. As of October 2020, there has been a loss of 700,000 jobs, with redundancies alone standing at 370,000 between August to October, and the headline unemployment rate at 4.9%. Things don’t look much better for 2021, with GDP forecasts for the UK looking set for a 10% contraction. By contrast, the World Bank forecasts global economic output to increase by 4% this year.

Overall, the consensus is not looking good, yet one sector that has not just seen growth, but supernormal profits appears to be the digital economy, with the Tech Giants of Amazon, Apple, Facebook and Google recording profits of $38 billion on nearly $240 billion in revenue at the last quarter. Broken down their profits look like this:

In the quarter ending on the 29th of October 2020:

Industries such as retail, aviation, hospitality and tourism have all been severely hit by the Covid-19 pandemic.

Incidentally these sectors all employ a large workforce and there are strong inter-industry linkages with upstream and downstream sectors, particularly in the aviation industry.

By contrast, with the exception of Amazon, the other Tech Giants employ relatively few workers in comparison to their revenues and profits. For example, in the UK, Facebook has a workforce of 4,000 workers, 3,000 of which are based in London.

By contrast, BA had a workforce of 42,322 and this includes only those directly employed by BA. If you factor in those employed in BA supply chains, those workers will be in their hundreds of thousands.

Likewise, pre-Covid, the hospitality sector employed over 3 million people across the UK and created over £130bn in economic activity. Losing these sectors has undoubtedly contributed to the rise in redundancies and UK unemployment figures.

This shift in profits to the Tech Giants is a further indictment of the growing concentration of wealth, and brings new challenges to policy makers.

Do these pressures need to be met with tax reform, and if so, is this the right time for reform?

The entire global and national taxation system needs reform due to how outdated current tax laws are, and their inability to adequately and fairly tax actors such as multi-national corporations in a globalised world.

The financial and fiscal implications of the Covid-19 pandemic are enormous, with the Office for Budget Responsibility predicting the minimum amount the government will have to borrow for the current financial year (March 2021), to be £394bn.

Our current Chancellor of the Exchequer, Rishi Sunak, has already warned that ‘hard choices’ will need to be made to tackle the record levels of national debt incurred during this Covid-19 pandemic, in order to ‘balance the books’ for future generations.

At Ethical Consumer, we believe ‘hard choices’ in the form of spending cuts or tax rises which affect ordinary people should be avoided, and that the focus of tax reform should be to redistribute, reuse and recycle the concentrated wealth in the hands of the Tech Giants.

Over the past 10-years there appears to have been a proliferation in the power, size and share of the market captured by the Tech Giants. These six companies alone have a combined market capitalisation of $4.5 trillion and are worth more than the 1000 companies listed on the London Stock Exchange.

The Fair Tax Mark organisation has conducted an in-depth analysis of the long run tax rate of the Tech Giants from 2010 to 2019. It has been found that there is a significant difference between the cash taxes paid and both the expected headline rate of tax and the reported current tax provisions in this period.

  • The gap between the expected headline rates of tax and the cash taxes actually paid was $155.3bn

  • The gap between the current tax provisions and the cash taxes actually paid was $100.2bn

In total this is an astonishing $240bn of corporate tax lost to governments worldwide.

The asymmetry between the Tech Giants profits and the wider public interest needs to be corrected. While the economic fallout from the Covid-19 pandemic calls for unprecedented government spending.

Taxing those who have largely avoided contributing to the public purse as well as recording record profits during the pandemic is an easy win for the government and would gather widespread public support.

Our Recommendations

In our submission to the Treasury, we recommended that until the Organisation for Economic Co-operation and Development (OECD) implement new global tax rules to prevent profit shifting by multinational companies.

The UK should build upon the 2% digital services tax that was introduced in April 2020 and increase it to 10%. Around the world, 36 other countries have already implemented digital services taxes including: Turkey, Canada, The Czech Republic and France.

The money raised from the digital services tax would help to finance the very costly social and health interventions the pandemic has required.

In order to prevent the tax being passed onto third party sellers or customers, as was the case with Amazon, the following amendments would need to be made to the next iteration of the UK’s digital services tax.

  • The new digital services tax must expressly prohibit companies from directly or indirectly passing on this tax to consumers or users.

  • The new digital services tax should apply to product sales for any company falling within its scope which is not able to demonstrate that a fair rate of corporation tax is already being paid. Companies would have to demonstrate this through transparent public reporting of country-by-country financial results and other data.

Given that the Tech Giants are one of the very few industries during this pandemic to have increased their profits, we believe it is only fair they pay this modest rate of tax to help the country get back on its feet after the Coronavirus pandemic. After all, those with the broadest shoulders should bear the greatest burden.

If you would like to follow our Covid-19 Tech Tax Campaign, please follow us on our social media channels and read our article on the next steps of our Tech Tax campaign.

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