Transforming taxation of the digital economy

Today a position paper was released by the Treasury, setting out the government’s view on the challenges posed by the digital economy for the corporate tax system and its preferred solutions.

Whilst companies that generate their income by users accessing their digital platform, for example search engine and social media sites, will be the companies initially targeted, the government is calling for a wide-ranging reform in respect of digital taxation generally.

The government is proposing to work with the OECD to consult for reform, but appreciates that this takes time – and it is not prepared to wait. It will look to bring in tax measures in the interim, the proposal being to consider a tax on revenues – a completely new concept in the UK, but an idea that our European neighbours have been considering recently too.

Whilst a change to the taxation of digital businesses is inevitable as the current tax rules pre-date the modern way of working, the solutions put forward by the government will be unwelcome news for large international businesses. The consultation comes on the back of significant international tax reform over recent years and large businesses will not want the uncertainty that yet another change to the way that they are taxed is on its way.

Politically, the government is keen to be seen to be cracking down on large international businesses operating in the UK paying a low amount of corporation tax compared to revenues generated. This announcement will certainly do that.