UK may drop Digital Services Tax to smooth over US trade talks

Report suggests Chancellor Rishi Sunak questions the validity of damaging relations over a £500 million tax

The UK government is reportedly considering dropping the Digital Services Tax in a bid to avoid any potential points of contention during upcoming trade talks with the US.

Finance minister Rishi Sunak is said to be planning to scrap the 2% tax that applies to American tech giants such as Facebook and Google, according to a report published in the Mail on Sunday.

The tax has previously branded as “unfair” by US officials, with trade representative Robert Lighthizer having already announced plans to investigate all countries that are adopting similar rules.

At the time, the UK Treasury defended the tax, saying it did not violate "international obligations". However, according to the most recent reports, the government might be reconsidering its position.

The presence of a unique tax against some of the US' largest corporations is likely to be a potential impediment to the UK’s bilateral trade deal with the US, as the country attempts to build new alliances following Brexit.

Questions have also been raised about the potential trade-off of such a tax, given estimates suggest it will raise just £500 million a year for the UK Treasury.

According to the Mail on Sunday, a finance ministry representative claimed the government has “been clear it’s a temporary tax that will be removed once an appropriate global solution is in place, and we continue to work with our international partners to reach that goal”.

This follows an announcement from the Treasury in June that the UK could remove the tax in the event of a broader deal. Last year, the EU decided to cancel its proposed plans to impose a digital tax on major multinational tech giants, announcing instead that it will wait for the G20 group to implement wider tax reforms.

However, both France and Spain have since introduced their own versions of the Digital Service Tax in the absence of a unified approach from the EU. According to latest reports, Facebook has agreed to pay France over €100 million in taxes as a result, including a penalty relating to its accounting years prior to 2018.

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