UK Chancellor Philip Hammond in his Autumn Budget speech today proposed a new tax on multinational firms designed to primarily reach firms in the digital sector. The UK government also published a position paper outlining its thinking on the taxation of digital firms.
Following consultation, the UK government will introduce legislation taxing multinational firm profits from selling products and services to UK customers where those profits have been transferred via royalties to a related entity in a low-tax country that owns the group’s intangible assets. The new tax would be implemented by extending the withholding tax on royalties.
The measure will be consistent with the UK’s tax treaties, Hammond said, and will apply from April 2019. Is expected to raise about £200m (USD 265 million) each year.
Hammond said the new tax would only partially address the problem of inadequate taxation of digital firms and is a short term solution pending international agreement on a rewrite of the international tax rules.
“Digitalziation poses challenges to the sustainability and fairness of our tax system, but this challenge can only be property solved on an international basis,” he said.
It is widely acknowledged that corporate income tax paid by digital firms is insufficient because outdated international tax rules allow these firms to easily avoid tax. However, coming to international agreement on how to fix the system is proving difficult, and nations have begun to look for temporary solutions.
The OECD is leading a push for a permanent solution to tax these firms more appropriately. An OECD task force is set to produce an interim report on the implications of digitaliation for taxation by spring 2018. A final report on the tax challenges of the digital economy will be produced in 2020, including a consideration of the issue of value creation in a digital economy.
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