Businesses encouraged to engage on UK's updated tax and digitalisation agenda

March 19, 2018

On 13 March HMT issued an updated position paper on corporate tax and the digital economy. This paper refines the earlier position paper (from November 2017) based on feedback that HMT has gathered from public consultation and interaction with stakeholders.

The paper re-iterates that the UK believes that current international tax rules create a misalignment between where digital business models create value and where they are taxed. That, it states, undermines the sustainability and fairness of the corporate tax system.

Building on the initial conclusion, the updated paper confirms that the ‘participation and engagement of users’ is the key characteristic of the digital business models that needs to be recognised by the international tax framework. As a second step it would be allocated a taxable base that the paper suggests should reflect its role in the value creation of a digital business.

The four hallmarks that are cited as creating value are:

  • generation of content,
  • depth of engagement with a platform,
  • network effects and externalities and
  • contribution to brand.

This is stated to be most relevant to social networks, search engines, and intermediation platforms. It is said to be less relevant to entertainment streaming services, online content websites, e-tailers, cloud computing, phones, tablets, and software.

The UK continues to favour a long term, multilateral solution, led by the OECD and the BEPS Inclusive Framework, that works within the existing framework (perhaps by amending OECD Model Treaty Articles 5, 7, and 9 to allow earners of residual profits to have a taxable presence where their group's users are located).

However, the UK takes the view that an interim solution may be required in absence of this. No timeline is specified by government for any interim measure, and it would rather do so with other international partners. The paper proposes tax on revenues as the interim measure. It states that this would need to be based upon specified channels, specified categories of business, or specified revenue streams that are most likely to gain the most value from user contribution.

There are many unanswered questions on how the interim or long term solutions would be applied in practice, including particularly on thresholds and the impact on small / loss making businesses. The UK remains open to further submissions at it refines its thinking further.

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