UK could drop plans to tax tech firms in rush to secure US trade deal

Boris Johnson’s plans for a multibillion-pound tax on tech companies such as Google and Facebook may be dropped in the post-Brexit rush to secure a trade deal with the US, trade experts have suggested.

The prime minister said internet companies needed to make a “fairer contribution”, as he indicated on Tuesday he would push ahead with a digital sales tax, despite opposition within his cabinet and a US backlash against similar plans from the French government.

There is a growing political consensus outside the US that the profit-shifting model is unsustainable. Labour included a pledge to tax large tech firms in its manifesto, while last year the Conservative party under Theresa May’s said last year it would introduce a digital services tax.

However, doubts have emerged about the government’s ability to raise taxes on one of America’s largest export industries at the same time as securing a wide-scale trade deal with the US.

David Henig, the director of the UK trade policy project at the European Centre for International Political Economy thinktank, said one option could be that Britain trades a digital sales tax in return for the removal of tariffs on British goods. In October, the US imposed tariffs of 25% on UK products such as whisky, biscuits and Savile Row suits after a World Trade Organization ruling against Airbus.

Johnson has made it clear he perceives a trade deal with the US as one of the key opportunities of leaving the EU, potentially putting the UK in a weaker negotiating position, Henig said. “They’re bigger and we want preferential access so the UK will have to give way on some issues.”

Matthew Oxenford, the lead UK analyst at the Economist Intelligence Unit, said: “If the UK isn’t going to put agricultural standards on the table, NHS pharmaceutical procurement on the table, access for US tech firms on the table, they’re running out of things to negotiate.”

A digital sales tax would represent a major change in the way multinationals are taxed. Under one common arrangement used by US tech firms, they lower their profits artificially in countries where they earn large revenues – such as the UK – by paying licensing fees to sister companies in lower-tax jurisdictions such as Ireland or Luxembourg.

France’s tech tax would charge digital services firms that generate annual revenues of more than €750m (£635m) globally and more than €25m in France 3% of their revenues in the country, making it much harder to shift profits across borders. The US responded with a threat of tariffs as high as 100% on French goods worth $2.4bn (£1.8bn), including cheese and champagne.

The tech firms have long been preparing for an EU crackdown, with Facebook hiring the former deputy prime minister Nick Clegg as its head of global policy. However, a source with knowledge of the regulatory strategies of multiple tech firms echoed view of the trade experts, saying the companies expected the digital sales tax would be dropped in US-UK trade negotiations. The companies are focusing instead on securing consistent rules across borders, which would make compliance less expensive, the source added.

The Information Technology Industry Council, a Washington-based tech lobby group, on Tuesday applauded the US government for defining France’s tax plans as discriminatory. It urged governments to focus on slower-moving but multilateral talks led by the Organisation for Economic Co-operation and Development.

Bernardine Adkins, head of EU trade and competition at the law firm Gowling WLG, said the UK would find it difficult to agree a trade deal with the US if it retained all of its red lines, adding that a multilateral solution was more likely.

“You do need an international solution to avoid double taxation,” Adkins said. “They [the tech firms] would rather that it happens in an orderly, predictable fashion.”