Google tells its thousands of advertising customers that they will be paying extra for ad space on YouTube and Google from November 2020. The UK’s new Digital Services Tax comes into practice this year and Google have made it clear that this extra 2% tax will be passed on.

What is the Digital Services Tax?

The Digital Services Tax has been discussed and agreed at European level, with specifics decided by each country. It is an attempt by governments to get global online companies to pay a more realistic proportion of tax, as compare to their revenue in each country. Both Turkey and Austria are charging it at a rate of 5%.

It applies to “Large multi-national enterprises with revenue derived from the provision of a social media service, a search engine or an online marketplace to UK users.” It is a 2% tax on these types of companies “who derive value from UK users”.

The problem is that “The application of the current corporate tax rules to businesses operating in the digital economy has led to a misalignment between the place where profits are taxed and the place where value is created.”

In other words, companies making a lot of money in the UK (and other countries) but not paying the tax bill you would expect, because they are tax registered elsewhere.

It is important to stress that this is not illegal behaviour on the part of these companies. Our laws enable this to happen. The introduction of the Digital Services Tax is one way to resolve the situation.

How have Google responded?

They are the biggest, so it is a good gauge of the industry to see how they are handling things. And they are passing the tax increase straight onto their advertising clients.

As reported in the Guardian, a Google spokesperson said: “Digital service taxes increase the cost of digital advertising. Typically, these kinds of cost increases are borne by customers and like other companies affected by this tax, we will be adding a fee to our invoices, from November. We will continue to pay all the taxes due in the UK, and to encourage governments globally to focus on international tax reform rather than implementing new, unilateral levies.”

Amazon have already said that they will do the same, charging sellers an extra 2% to use their platform. It is expected that Facebook will follow suit.

How much will this new tax really cost these massive companies?

Last year, Google UK’s revenue went up by £.4bn, to £1.6bn. Their Corporation Tax bill was £44million.

eMarketer is a research company and their investigation throws up some interesting figures. They estimate that last year, the UK’s ad market made up 39% of Google’s annual total, at £5.7bn. And this year it’s set to rise to over £6bn. 2% of this is £122m. That’s how much the Digital Services Tax will cost Google, in comparison to an estimated revenue totals.

What do advertisers think?

Obviously, this is 2% sliced off the total advertising budget, which is never a good thing. But it’s not like they didn’t see it coming.

The director general of the Incorporated Society of British Advertisers ISBA), Phil Smith said in a statement: “While this is disappointing news for our members, it is the inevitable outcome of the UK’s unilateral approach to digital taxation. We have been consistent in warning government of the potential consequences of this approach, including the risk of an increase in costs to advertisers in the UK market. With further headwinds from government hitting the advertising sector in the coming years, it’s time government proved that they recognise the importance of the sector to the economic recovery.”

I guess the next question is: will companies pass on this new tax to their customers, to make up the deficit in their marketing departments? Only time will tell.