Following the Chancellor’s Spring Statement, HM Treasury has published an update to its November 2017 position paper in respect of corporate tax and the digital economy (original paper discussed here and updated paper available here).
The updated position paper sets out three key points: (1) the participation and engagement of users is an important aspect of value creation for certain digital businesses, (2) the preferred solution to tax this value creation is comprehensive tax reform at OECD-level, and (3) pending the development of multilateral solutions, the UK may implement interim measures (eg a turnover tax). This two-stage approach resonates with the leaked EU proposal for an interim ‘targeted solution’ (see our article here for a summary of the EU proposals).
The position paper outlines a distinction between (i) the role that customers serve in a business generally, and (ii) user participation, the latter being something more than just the mere collection of user data by looking to a broader, more active user relationship that is central to the way a business creates value. In this context, the Treasury considers it justifiable to reallocate profits within corporate groups to the jurisdictions in which users who create value are located, whilst voiding cutting across the arm’s length transfer pricing principle.
The position paper suggests that the value of user participation may be captured by reallocating a percentage share of residual profits (currently treated as realised in low or no tax head office or IP jurisdictions) to onshore jurisdictions where users are located. Recognising that user participation can be more or less material to different digital businesses, the paper proposes an approach whereby the relevant percentage share can be tailored to different business models following OECD guidance in this respect.
As emphasised in the leaked EU paper, this international reform will take some time to negotiate and implement, and so the Treasury suggests that the UK considers a turnover tax on certain digital businesses in the interim. The exact scope of this tax would need to be determined, but it is proposed (by way of example) that the revenues generated by online advertising businesses for adverts targeted at UK users would be chargeable to UK tax under this regime.
The Treasury will continue to consult on the proposals outlined, particularly on the scope of businesses that should fall within the proposed interim turnover tax and the revenues that should be chargeable. Written responses can be made by email to firstname.lastname@example.org or by post to HMRC’s Corporate Tax Team. Please contact your usual CMS representative if you require any assistance with a submission.
For more information in respect of changes affecting the digital economy in the UK and internationally, please see our articles: Leaked document reveals EU proposals for taxing the Digital Economy (here), EU proposals move ahead for a common corporate tax base (here), Europe Taxing the Digital Economy: could a turnover tax be on the horizon? (here), Taxing the Digital Economy: first steps by the UK (here), Public Input on Taxing the Digital Economy (here), and EU blacklist of tax havens and plans for taxing the digital economy (here).