UK government stakes out new position on taxation of digital economy

By Heather Self, Blick Rothenberg, London

The UK government today published an updated position paper in relation to corporate tax and the digital economy as a part of Chancellor Philip Hammond’s Spring Statement. The paper does not set out any conclusions, or a clear way forward, but builds on a previous paper from November 2017.

There is a strong perception that there is a “misalignment” between where digital businesses are taxed and where they create value, and that this “threatens to undermine the fairness” of the corporate tax system. 

The long-term proposal is to update the international tax system by recognising “user-created value” as one of the profit drivers of certain digital businesses. The OECD’s principles on transfer pricing and permanent establishments would need to be updated, and it is far from certain that consensus on this could be reached. In particular, why should the US government – the key base for many digital companies – be willing to give up taxing rights to countries where users are located?

Recognising that a long-term solution will be difficult (if not impossible), the government also proposes exploring interim solutions. Here there is strong alignment with the work of the EU, and a proposal that some sort of tax should be imposed on the revenues of digital businesses, where those businesses derive “significant value” from UK user participation.

The tax would be applied wherever the business was located and regardless of whether it had any physical presence in the UK, which could pose some difficult questions about collection and administration. Nevertheless, the government says that it will ensure that the tax is compatible with its double tax treaties and wider international obligations.

The government is keen to ensure that any proposal does not undermine wider objectives for growth and innovation.  A high de minimis threshold is therefore likely, but for larger businesses there remain significant challenges in setting any tax at a level which is both proportionate and raises a meaningful amount of revenue.

Interestingly, the paper does not provide any further update on a proposal, outlined at the Autumn Budget 2017, to impose UK withholding taxes on certain royalties paid to no or low-tax jurisdictions.

A separate consultation paper was issued on 1 December 2017, with the consultation closing on 23 February 2018. It appears that this proposal will be implemented as planned in 2019. 

The paper appears to be mainly a position paper which provides the UK government’s input to the forthcoming OECD and G20 discussions.  It raises many more questions than answers, and can perhaps best be summed up in two words:  “It’s difficult”.

The paper invites comments (although without setting a specific deadline).  Blick Rothenberg Ltd will be considering and submitting our views in due course. 

 

–Heather Self is a partner at Blick Rothenberg, London. She can be reached at [email protected].