The UK government has introduced a Digital Services Tax in order to close the gap between revenue made by multinational corporations – such as Google and Facebook – and their tax contributions in the UK.
However, rather than directly taking the hit on their revenue (revenue which is quite substantial – an estimated £5.1B in the UK in 2019 – considering they are one of the so-called tech giants), Google has decided to charge an additional fee to their advertising customers from November 2020.
We explore what this means for those advertising on Google and YouTube and why advertisers may find it frustrating.
From 1st April 2020, the government has introduced a new 2% tax on the revenues of search engines, social media services and online marketplaces which ‘derive value from UK users’. This tax is aimed at large multinational enterprises such as Facebook, Amazon and Google.
It will apply to businesses that generate more than £500 million in annual revenues worldwide, as long as more than £25 million of this is linked to UK users. Businesses will not have to pay tax on their first £25 million of UK taxable revenues.
The introduction of the levy is an effort to narrow the gap between the revenue created and the tax paid by multinational enterprises in the UK. The government expects the tax to raise £515 million by 2024, with the first year bringing in £70 million.
Essentially, the tax rules for international corporations operating in the UK and other countries are still quite slippery and there are ways for companies like Google to reduce the amount of tax they have to pay in each country.
Google UK paid just £44.3 million in corporation tax in 2019, quoting their operating profits at £225.8 million, despite giving out over £1 billion in bonuses and wages. This was a decrease on the tax they paid in 2018 (£65.6 million), despite an increase in their revenue, as their quoted operating profit was lower.
Plus, as we’ll explore later in this article, the revenue and profit declared by Google UK is likely not an accurate reflection of the real economic profit made by the company from its activities in the UK.
The government believes that current international corporate tax rules have led to “a misalignment between the place where profits are taxed and the place where value is created”. In other words, the UK users of digital services are offering more value to the company than the amount of tax that they pay in this country.
The government is still pushing for international corporate tax reform in the long-term and support discussions on reform. This Digital Services Tax could therefore be seen as a ‘meanwhile’ measure – intended to claim tax from the tech giants until a more appropriate and permanent solution is in place.
Google, amongst some of the other big digital companies, have decided to deal with the payment of this additional tax by introducing a new fee to advertisers in the UK.
This means that, for adverts that are served in the UK from November 2020, Google will be charging new fees based on the Digital Services Tax. This is charged at 2% and will apply to both Google Ads and YouTube adverts.
Advertisers will see the 2% ‘UK DST Fee’ added to their invoices. These fees will be added on top of your overall account budget so this should be factored in when it comes to budgeting and planning any campaigns.
The short answer? This does seem to be the case.
Google have argued that their overall costs of operating in the UK will increase as a result of this tax, which is why they have introduced the new fee. They also believe that the UK government should wait until an international tax agreement is agreed before imposing new levies.
“Digital service taxes increase the cost of digital advertising,” said a Google spokeswoman quoted in a Guardian article.
“Typically, these kinds of cost increases are borne by customers and like other companies affected by this tax, we will be adding a fee to our invoices, from November. We will continue to pay all the taxes due in the UK, and to encourage governments globally to focus on international tax reform rather than implementing new, unilateral levies.”
Google UK reported £1.6bn in revenues in 2019, although this does not reflect the actual figure because it is widely understood that not all of Google’s UK advertising revenue is reported through their UK subsidiary. In fact, research firm eMarketer estimates that Google made about £5.7bn in ad revenues in the UK in 2019.
Furthermore, a 2019 report by Fair Tax Mark found that ‘The Silicon Six’ – Amazon, Facebook, Google, Netflix, Apple, and Microsoft – had avoided more than $100 billion of global tax over the last decade. They did this by exploiting tax loopholes such as moving revenue and profits through low-tax countries and tax havens.
Despite this, Google seems to think that the UK DST is unfair given the lack of consistency between different countries, and that the government should simply wait until international tax reform for digital companies is agreed. This is the argument they have used to justify the additional fees.
However, not all companies affected by the Digital Services Tax have decided to charge their customers based on this additional levy. eBay, probably the most well-known online marketplace after Amazon, will not be charging their sellers any additional fees.
If this announcement makes you want to avoid Google, at least some of the time, we’re here to tell you that it is possible. Despite the fact that ‘Googling’ something has become synonymous with ‘searching for’ something, it isn’t the only search engine out there!
In fact, there are a selection of search engines which give back a large proportion of their profits. One such platform is SearchScene, the charitable search engine that donates 95% of profits made from advertising to charity*.
Hopefully this blog has explained why an additional fee will be added to Google Ads invoices from November 2020. It doesn’t seem that Google will shift their position on this so we’ll have to be optimistic that international tax reform for digital companies will be introduced soon, and we will no longer have to worry about the DST fee.
If you have any questions about this new fee or anything else, you are welcome to get in touch with us.
*The Click Hub does have a commercial relationship with SearchScene but this article is not sponsored in any way.