Digital services tax

The Government has built on its position paper published earlier in the year with a proposal for an interim tax on certain larger digital businesses, commencing in 2020.

Growing consensus internationally has it that the BEPS project did not fully tackle the fair taxation of digital businesses. The OECD convened a new working party, producing a situation report earlier in the year ahead of a further paper due next year and final recommendations due in 2020. Separately the EU Commission developed and published its own proposals and the UK Government published a position paper: both of these raised the prospect of introducing an interim measure whilst the difficult task of solving the fair taxation of digital business is worked through.

A few countries had gone ahead with their own measures, but the US Government’s strong reaction to the prospect of a wider interim measure (since US corporations in the main would be most affected) had cast some doubt over the UK Government’s appetite to pursue this given forthcoming talks over a trade deal.

The Chancellor’s announcement was nuanced: making it clear that it was intending to tax large multinationals without negative impact on the UK’s substantial entrepreneurial tech economy. The Government is committed to continuing discussions with the OECD and G20 to future reforms of the international tax system, but will introduce its own measure if the discussions have not concluded on a multi-lateral solution by 2020.

At 2 per cent on revenues the proposal is lower than the 3 per cent proposed by the EU – bearing in mind this is a tax on revenues not profit, a one percent reduction is significant (and acknowledgement of criticism that the 3 per cent was not economically justifiable).

As a tax on revenues, rather than profits, the digital services tax would seemingly not qualify for double tax relief under the UK’s treaties: this may be deliberate as diverted profits tax provides precedent.

The proposal has narrow scope – applying to business providing search engines, social media platforms and online market places where the enterprise has total related global revenues of at least £500m and revenues from activities related to UK users are at least £25m per annum. Exemptions for loss-makers and low margin businesses are proposed.

The proposed tax relates to the revenues derived by the business (for example advertising or data analytics) but not, say, to the transactions between users on the platform itself. More details will be needed to ensure accurate measurement of the £25m threshold. 

Much of the OECD’s current work focuses on user created value: where a business’s ability to earn profits is derived from information and relationships that are not directly part of the profit making contractual supply. This measure seems to give a nod to that work albeit that the OECD observes that there is no consensus over the need for an interim measure.

The way digital businesses are taxed internationally is likely to change significantly over the next few years. This is the UK Government putting down a marker in the international tax system as well as sending a political signal in relation to large multinationals who have structured themselves to reduce their UK tax liabilities. A watching brief is required as more developments are expected.

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