HM Treasury has published a position paper in respect of taxing the digital economy (available here) following the Chancellor’s Autumn Budget.
The paper proposes that multinational groups’ profits should be taxed where value is generated. For example, a social media business generates value through users worldwide, but is only taxed where it is tax resident or has a permanent establishment. According to the paper, the UK government intends to:
- push for international tax reform to ensure that value created by digital businesses is taken into account when determining whether, where and what profits are subject to tax;
- explore interim fiscal options in respect of digital businesses prior to the reform of the international tax framework, including taxing in the UK revenues that businesses generate from the provision of digital services to the UK market. (It is noted that the UK would be ready to take unilateral action in the absence of sufficient international action); and
- tackle practices by multinational groups that achieve low-tax outcomes by holding valuable assets in low-tax countries where they have ‘limited economic substance’.
While the paper does not propose any specific measures in respect of 1 and 2 above, the UK government intends to consult on extending UK withholding tax (currently at a rate of 20%) from April 2019 to royalties paid to entities holding intangible assets in a low-tax jurisdiction by UK or non-UK entities, which sell products and services to the UK market. This extension of withholding tax is stated to be applied consistently with the UK’s double tax treaties.
The royalty withholding tax extension may pose a threat of double taxation where the royalty payer and payee are both offshore, but making sales/supplies in the UK where the non-UK payer is also required to withhold tax in its home jurisdiction. Without an effective tax credit or other mechanism, this type of double taxation could be unrelieved, as double tax treaties are not designed to resolve such source-source conflicts. For example, the Netherlands (where royalty paying companies have historically been situated) has proposed introducing a royalty withholding tax, which combined with the UK withholding tax would mean that a group member licensing intangibles that are used for UK operations could suffer double taxation.
The paper also mentions the Autumn Budget announcements in respect of improving VAT collection on online marketplaces. The UK government will legislate to extend online marketplaces’ joint and several liability for the unpaid VAT of traders, which use their platforms to include not only overseas but also UK traders. Such online marketplaces will also be liable for unpaid VAT where they knew or should have known that a business should have been registered for UK VAT and was not. Further, the UK government is considering a split payment model (allowing VAT to be extracted directly by HMRC from transactions at the point of purchase) and, following a call for evidence after the Spring Budget 2017 (available here), a response will be published in December 2017.
Feedback is invited in respect of the paper until 31 January 2018. Responses may be addressed in writing to: Corporate Tax Team HM Treasury, 1 Horse Guards Road, London SW1A 2HQ or by e-mail to: firstname.lastname@example.org.
For information in respect of the EU developments in this area please see our articles Europe Taxing the Digital Economy: could a turnover tax be on the horizon? (here) and Public Input on Taxing the Digital Economy (here).