If you thought the worldwide pandemic was as worse as it was going to get in 2020, then Google just proved you wrong.
For several weeks, the digital services tax has surprised many online businesses who operate online, but now, Google has unexpectedly passed the tax directly on to its customers in some jurisdictions.
But what exactly does that mean? And how much of an effect will it have on your Google Ads spending and budget?
Here’s everything you need to know about the digital services tax and how it will affect your Google Ads account.
What Is The Digital Services Tax?
On the 1st of April 2020, the UK government introduced the Digital Services Tax. Some people thought it was a terrible April fools joke, but since it’s still around in September, we can safely say it’s not.
In simple terms, the tax specifically targets the UK revenue of search engines, social media services and online marketplaces that are derived from UK users.
If UK user Matthew spends £10 on any form of social media advertising, search engine advertising, or online market place advertising, the business will be charged 2% tax.
However, if Chad from the USA spends $10 on advertising that targets the UK, his revenue would also be taxed at 2%.
There are specific definitions by the government on what businesses are affected by this tax, as the government gives businesses a £25 million allowance. But all you really need to know is that all the major social media, search engine and marketplaces are affected.
Why The Tax?
For many years, big tech companies have been consistently making the headlines for their aggressive tax avoidance. Tech companies such as Amazon, Google and Facebook have all been criticized for paying very little tax in the UK due to clever tax schemes.
The introduction of this digital services tax is most likely an attempt by the UK government to get more tax from these large tech companies. By imposing a direct tax like this, it makes it much harder for them to avoid it using tax avoidance schemes.
But it’s not just the UK who have a digital services tax.
Turkey implemented its digital services tax on 1st March 2020, and it’s currently a whopping 7.5%.
Austria also introduced their own digital services tax on 1st January 2020 and that currently stands at 5%.
So compared to other nations with digital services tax, the UK is currently the lowest. Other countries such as the USA are considering introducing digital services taxes, but only time will tell if it gets passed and what percentage it will be.
Every UK based business, agency, or individual that runs ads on Google Ads will be affected by this tax starting on November 1st 2020. It will also affect users from other countries who run ads targeting the UK.
Instead of absorbing the tax like expected, Google has passed the tax on to its users and updated its fee’s terms of service.
Their new fee’s terms of service now state that:
“The new fees will be subject to any taxes, such as sales tax, VAT, GST, or QST that apply in your country. Any taxes, such as sales tax, VAT, GST, or QST that apply in your country will be charged in addition to the new fees.”
This means that everyone in Turkey and Austria will also have to pay the digital service tax from their own pockets, which is a massive blow to advertisers.
What Are Other Tech Businesses Doing?
As this tax affects many businesses aside from just Google, how are other large tech giants handling the tax?
Amazon recently announced that they would charge all UK sellers an extra 2% fee to cover the new tax starting on the 1st September 2020.
But unlike Amazon and Google, there are some companies that have vowed not to pass it on to consumers (although that could always change). Amazon’s rival eBay has recently announced that they don’t plan to pass on any of the tax to consumers.
So far, there hasn’t been any announcement from Bing and their ads service, so we can only assume that unlike Google, they are absorbing the tax.
How To Prepare For The Change
At the moment, it looks like there is no way for UK users to avoid this extra fee on Google Ads. This means that businesses should be reviewing their current Google Ads spend and how this increase will affect their campaign’s profitability when it takes place in November.
With only two months until the fees increase, it’s very possible that some budget cutbacks might be required. In terms of how the fee payments work, they won’t be taken from your existing Google Ads budget. This means that if you spend £1,000 a month in Google Ads spend, you’ll see an additional £20 fee slapped on top.
If you want to still maintain your £1,000 a month budget, you’ll actually have to reduce your ad spend by approximately 2%. Be sure to factor this into your new budgeting and forecasting.
As Google Ads is currently the largest PPC network out there, it’s unlikely this will have any significant effect on Google, or it’s advertisers. It just means running ads in certain countries is about to become a bit more expensive for everyone.