The UK’s finance minister Philip Hammond last week announced a new “digital services tax” on tech companies as part of Britain’s annual budget. The new 2% tax on revenues will apply to “search engines, social media platforms and online marketplaces, reflecting the value they derive from UK users.” It will only apply to companies with revenues of over £500m that are profitable in the UK.
Britain hopes to raise almost £1.1bn ($1.5bn) through the tax by 2024. It will come into force in 2020.
Moody’s senior vice-president Neil Begley and analyst Vincent Tingos said in a note sent to clients on Monday that Facebook (FB) and Google-owner Alphabet (GOOG) appear to be the “primary targets” of the tax but it would likely also hit Amazon (AMZN) and Uber.
“The implementation of such a tax would be credit negative for these and other digital information companies because it would reduce free cash flow generation and scale back the tax benefits achieved through the US Tax Cuts and Jobs Act of 2017,” the pair wrote.
Moody’s expects Netflix (NFLX) to avoid the tax as it makes money by selling services directly to consumers, rather than selling on data about customers to third parties.
Begley and Tingos said that the new tax could create further headaches for US tech companies by encouraging other countries to adopt similar levies.
“If the UK is successful in enacting a digital services tax, it might encourage other countries in Europe or the Asia-Pacific region to impose similar taxes of their own,” they wrote. “Given that these regional markets are far larger than the UK alone, this could have a significant effect on how Alphabet and Facebook view their business models.
“Within the European Union, there have been reports that 11 of 28 member states are already considering their own digital services taxes if a common agreement cannot be reached.”
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