The tax will amount to 2% of the revenues of search engines, social media services and online marketplaces that derive value from UK users. Known as the Digital Services Tax, or DST, it'll apply to all digital services with global revenues of £500 million ($647 million) or more, with at least £25 million ($32 million) deriving from users in the UK. It's expected to bring in £65 million ($84 million) this year, and around £87 million ($113 million) annually.
The tax was expected to feature in the government's 2020 budget statement Wednesday, but it was instead announced in a policy paper published on the government's website.
The UK's decision to press ahead with taxation comes amid efforts by the Organization for Economic Cooperation and Development (OECD) to reform international tax rules, which will likely result in digital companies being taxed more widely around the globe, amounting to an estimated $100 billion annually. Some countries, namely the UK, France and Spain (which approved a tax plan last month), have decided that they'll implement their own tax rules while waiting for globally agreed measures to come into play.
But unlike France, the UK will start collecting tax next month. France agreed in January not to start collecting the new tax until the end of 2020, after it was threatened by the US with tariffs.
The British government has previously insisted that the tax is not discriminatory against the US, because it applies to all large digital companies, not just those in the states. But with the majority of companies affected by the tax based in the United States, the decision to push ahead with taxation is still likely to increase tensions between the two countries. Speaking at Davos in January, US treasury secretary Steven Mnuchin said the US would likely retaliate with a levy on UK car exports.
At the time of writing, US President Donald Trump hadn't responded to the UK's announcement. Representatives for the White House didn't immediately respond to a request for comment.
Current relations between the US and UK are already on rocky ground, following British Prime Minister Boris Johnson's decision earlier this month to keep using equipment made by Chinese company Huawei in noncore parts of the country's 5G infrastructure. Ahead of the decision, the US previously exerted significant pressure on the UK not to keep using Huawei equipment, in keeping with its own policies, and warned that intelligence-sharing agreements were on the line. The UK's failure to comply with this request reportedly resulted in a tense phone call between Trump and Johnson, after which Johnson canceled a planned visit to the White House.
Tensions between the US and UK over tech issues are arising at a delicate moment. The two countries are supposed to work together later this year to negotiate a trade deal, following the UK's departure from the EU in January.
The arrival of a digital tax is also unwelcome news for the wider tech industry. Tech lobbying group Information Technology Industry (ITI), whose members include Amazon, Apple, eBay, Google, Facebook, Snap and Twitter, issued a statement Wednesday expressing its disappointment with the decision and asking the government to rethink its approach at this critical juncture.
"At a time when the US and UK governments are poised to initiate negotiations aimed at deepening their trade and investment relationship, we urge the UK government to reconsider its national digital services tax and recommit to reaching a lasting, multilateral solution at the OECD," said Jason Oxman, ITI's CEO.
In the proposals published Wednesday, the government said it still thinks reaching an agreement with OECD on reforming international corporate tax rules is the most sustainable, long-term solution. Its own digital tax is therefore designed to serve as an interim measure and won't apply once an "appropriate international solution" is put in place, it said.