The Government issued an initial paper on taxation of the digital economy following the autumn Budget and an updated position paper has been released today.
The updated paper sets out the Government’s view that:
- The participation and engagement of users is an important aspect of value creation for certain digital business models, and is likely to be reflected through several channels, such as the provision of content or as a contribution to certain intangibles such as brand.
- The preferred and most sustainable solution to this challenge is reform of the international corporate tax framework to reflect the value of user participation. It is important that the members of the OECD’s Inclusive Framework make progress in developing multilateral solutions, and to assist this process the paper sets out some of the government’s initial considerations on what this could include.
- Of the options that have been put forward, the Government currently favours a tax on the revenues that businesses generate from the provision of digital services to the UK market.
There are a number of important design decisions that need careful consideration:
Scope: The government has said that the scope of the proposed tax should align with specific concerns about user participation not being given sufficient recognition by the international tax framework. That concern seems relevant to businesses that generate revenues through inter-mediation and the provision of online advertising. The concern seems less relevant to businesses that generate revenue through selling self-developed goods to customers through an online platform, selling acquired goods on an online platform, charging customers for the provision of digital content, or charging customers for the provision of digital software and digital services.
Nexus: It will be important to consider what revenues the UK would have a right to tax given the lack of a typical consumer in these businesses models and the possibility of users being located in a different country from consumers (or the users of an intermediation platform being located in different countries). For example, where a social media platform generates revenue from a non-UK business in relation to adverts targeted at UK users.
Rate: The rate would need to be set at a level that raises material revenue in a way that is nonetheless fair, non-distortive and applicable to business models with different profit margins.
Collection mechanism: There are different ways such a tax could be collected. There are potential benefits to collecting the tax directly from the relevant companies, to ensure more efficient compliance and avoid placing new obligations on financial intermediaries, as may be the case under a withholding model.
The Government intends to consider how the possible distortions with a revenue-based tax could be minimised, for example through the provision of double tax relief, de minimis thresholds and mitigating provisions for loss-making and early-stage businesses. While the UK is ready to take unilateral action, there would be value in co-ordinated implementation of such a tax between countries. This would minimise administrative burdens for businesses operating in different jurisdictions and reduce some of the challenges associated with the collection of tax and the calculation of businesses’ tax liabilities. For that reason, the government has asked that interim solutions of this nature should be actively considered in the OECD’s interim report, which should also take into account analysis currently being undertaken by the European Commission.