The U.K. government today announced plans to levy a “digital services tax” on major tech firms that could add up to hundreds of millions of dollars per year.

The proposed scheme, which is set to take effect in April 2020, would require companies such as Alphabet Inc. and Facebook Inc. to pay a 2 percent tax on certain income generated within Britain. The plan covers many, but not all, of the core revenue streams through which the world’s tech giants make their living.

The U.K. plans to tax ads on social media, display advertising next to search results and commissions on transactions made via online marketplaces between U.K. users. The fact that the latter clause is limited to e-commerce purchases involving British sellers may mean Amazon.com Inc. will take a smaller hit than the likes of Facebook.

The final version of the proposal could see the impact on the retail giant reduced even further. In a speech to the U.K. parliament, British finance minister Philip Hammond said the scheme will be implemented differently than a traditional sales tax to avoid passing on the cost to consumers.

Nevertheless, the plan has the potential to hike tech giants’ U.K. tax bills noticeably. Hammond said the plan is expected to raise £400 million, or $512 million, per year based on the current revenues of the affected companies. To avoid impacts on startups, the proposal is worded so that it only applies to profitable firms with more than £500 million, or $640 million, in annual global revenues.

The tax scheme marks a notable shift in policy toward the tech industry. The current standard practice in the U.K. and elsewhere is to apply taxes on companies’ profits rather than revenue, a policy that has worked in favor of the industry’s largest players. Amazon paid £4.5 million in taxes on last year on total U.K. revenues of £8.7 billion, while Google incurred a £49 million tax bill on revenues of £7.6 billion.

Governments worldwide have started pushing for tech companies to contribute more to public coffers. The European Union is reportedly working on legislation that could levy a tax of three percent on tech companies’ gross regional revenues, while Singapore, India and other countries in Asia are exploring similar measures.

At the same time, tech companies are facing increased scrutiny over issues such as user privacy. Last week, the U.K.’s privacy watchdog handed down a $664,000 fine to Facebook Inc. over its handling of the Cambridge Analytica scandal. 

Photo: Unsplash