How Will Budget Amazon Tax Affect Investors?

Chancellor Philip Hammond's Digital Services Tax was an eye-catching Budget measure. But how will it affect the likes of Amazon, Google and Facebook?

David Brenchley 30 October, 2018 | 2:10PM

Philip Hammond, Budget 2018, Budget, Amazon Tax, Digital Services Tax, Amazon share price

The UK’s new Digital Services Tax, announced in Philip Hammond’s Monday Budget, could start a backlash against the US tech giants like Amazon (AMZN), Google (GOOGL) and Facebook (FB), analysts worry.

Chancellor Hammond announced a string of initiatives to help the UK high street ward off the online threat of the likes of Amazon, with the Digital Services Tax the most eye-catching.

While not strictly aimed at high-street disruptors, the tax has already been dubbed “the Amazon tax”. Sacha Chorley, portfolio manager at Quilter Investors, says it is an attempt to “level the playing field between online businesses, including e-retailers, and traditional shops and retail outlets”.

Chorley adds: “The tax will be welcome news for traditional business trying to compete with the global tech giants.”

But, in addition to online marketplaces like Amazon, it will also target search engines like Google and social media platforms such as Facebook.

Currently, these firms are taxed on their profits, which is generally a much smaller figure and can be easily manipulated. Now, companies with over £500 million of global revenues will have to pay a 2% tax on the revenue they earn from UK users.

“The global tech giants have proved slippery customers for tax collectors,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “Focusing on revenues rather than profits makes it more difficult for companies to squirm out of their obligations.”

Hammond tried to allay fears it may hit smaller companies by including a safe harbour provision that “exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins”.

Tax Raised Will Cover Potholes

Charles Calkin, partner at James Hambro & Company, says it won’t raise that much. The Government estimates it will bring in £275 million in 2019-20, rising to £440 million in 2022-23, which will “just about pay for the pothole repairs promised”.

Stephen Yiu, manager of the Blue Whale Growth fund, which holds Google parent company Alphabet, Amazon and Microsoft in its top 10, says the tax is completely fair. “Everyone knows these companies don’t pay their fair share of tax.”

However, he thinks it’s too much of a short-term, protectionist solution. Looking 10 years out, he says the £4 billion raised in tax revenues pales into insignificance when compared with what would be gained from working with these firms to help boost employment and workers’ skill sets.

He draws parallels with Donald Trump’s tariffs, which had the ultimate goal of making it attractive for both American and overseas companies to bring back or re-locate their manufacturing bases to the States, thus creating more jobs and training opportunities.

What they should have done, says Yiu, is worked with these firms, which have a big presence in the UK. “They could create more jobs, or opportunities for the UK workforce to be trained in e-commerce and the digital economy and the UK would prosper over time.”

The logistics of implementing such a targeted taxation package will be “extremely complicated” and could be why the legislation is slated to come into force in April 2020, says Chorley, giving time to structure it effectively.

“They will need to define exactly which businesses qualify and prevent them from avoiding the taxation by tweaking their model or the legal language they use to describe their businesses,” Chorley explains.

He suggests that the sensible approach would be for the big tech companies to work alongside Government through the consultation period to implement the tax properly.

How Much Will Impact Will the Tax Have?

While the tax isn’t insignificant, in isolation it shouldn’t make a big difference to revenues and profits, many believe. In fact, it’s hard to predict how much of an impact it will have as most tech firms only break their revenues down into US and non-US, notes Ben Barringer, equity analyst at Quilter Cheviot.

“A sensible estimate of UK exposure for companies like Alphabet, Amazon and Facebook might be between 5-10% of revenues, however,” Barringer adds. “So, while the UK is more important than many other non-US markets, it still only accounts for a small percentage of their revenues.”

As the “Amazon tax” moniker suggests, Stephen Yiu, manager of the Blue Whale Growth fund, says it is they who will feel it most. This is due to the impact Amazon’s dominance is having on local businesses. Facebook and Google, on the other hand, are not.

“Amazon is probably the one that politicians focus on the most because they compete head-to-head with local businesses like small shops and retailers,” says Yiu.

But it’s the bigger picture that is more concerning. “The worry for the tech giants, and their shareholders, is that this is the pebble that starts an avalanche of taxes from international governments,” says Khalaf.

It should be notes that the European Union has proposals to bring in its own digital levy, which would tax firms with €750 million (£668 million) of worldwide revenues and €50 million of EU revenues, at 3%.

The EU has also pledged to “continue to actively contribute to the global discussions on digital taxation within the G20/OECD, and push for ambitious international solutions”.

But Barringer claims this is not of immediate concern. He also expects the proposals to face pushback from the low-tax jurisdictions which benefit from the status quo, like Ireland and Luxembourg, where many tech firms are currently domiciled.

Overall, Yiu thinks the impact higher tax rates will be minimal, while Barringer recommends that investors focus on fundamentals like earnings growth, which continue to be strong for both Alphabet and Amazon.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Alphabet Inc A1,047.80 USD1.68
Amazon.com Inc1,535.00 USD2.64
Facebook Inc A135.35 USD2.20
LF Blue Whale Growth I Sterling Acc108.01 GBP-3.88-

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk