UK Digital Tax
October 25, 2018
The Chancellor and Financial Secretary to the Treasury have increasingly raised the prospect of a UK Digital Services Tax (DST) in the past few months. The Chancellor is reported to have told officials that “nothing is off the table” and his conference speech noted that “the time for talking is coming to an end and the stalling has to stop … if we cannot reach [multilateral] agreement the UK will go it alone with a digital services tax of its own.”1
But how likely is it that the “time for talking” will have come to an end by 29 October? Considering both the domestic and international interactions is key to understanding the likelihood of a unilateral UK DST being announced in the Budget. It could be a political 'win/win' and as such, should not be overlooked.
The domestic environment is a challenging one. On the international front the implementation of the BEPS Action Items and US Tax Reform have not yet filtered through into many companies’ accounts and tax payments. This alone is unlikely to address a growing concern that in a digitalising world more of the tax base itself should be allocated to users and markets than to capital and production.
But changing the UK’s corporate tax rules would be out of line with the global consensus and in most cases would be overridden by existing treaties. A turnover tax is therefore touted by many as a necessary way to remedy the issue - at least for the short term.
The international environment is a more complex tapestry . The OECD is seeking to reach a global agreement on a long term corporate tax solution, but while an interim report in 2019 may offer a framework, it will not make final recommendations until 2020. Even if agreement is reached, it will take further time to implement.
Some countries have already sought to introduce turnover taxes on various digital activities in lieu of this, but in terms of reaching a consensus, the EU is the only group of countries that is seriously discussing coordinated action on turnover based measures. A proposal was put forward by the European Commission in March to levy a 3% tax on revenues generated from some digital interactions with EU users (being where large business’ revenue arises as a result of targeted advertising to, intermediation involving, or sale of data collected from EU users). The detail and success of this proposal rests in the Council of EU Member States.
The rotating Council Presidency passes to Romania in January 2019, and Finland in July 2019. Neither country has been publicly supportive of the DST. In addition, the European Parliament elections and the corresponding Commissioner election will take place in the first half of 2019, alongside Brexit. So while it is possible that the European Union could agree a Directive to implement a DST across the Union in 2019 there are practical challenges. In contrast, the Council is currently under Austria’s leadership, and several Member States are said to be eager for an agreement this year. Accordingly there is some pressure to reach agreement by their December 2018 meeting.
If they do, this could be championed as an achievement of the EU a few short months before the UK leaves it, rather than the UK government being tough on highly digitalised businesses.
An alternative would be to announce a UK DST in this year’s Budget. If the EU does reach agreement, then 2019 could be used to ensure that the corresponding UK legislation is aligned with the EU Directive (and the announcement itself, alongside those already made by Spain and Italy, places even more pressure on Member States to agree). If the EU doesn’t reach agreement, then this will be seen by many as justification that the UK needed to move ahead unilaterally (even if such justification is post hoc).
The benefits do not end there. A UK DST might raise around £0.5bn per annum (based on the Commission’s EU wide estimates and the UK’s share thereof based on its population size). While only a fraction of what the Chancellor needs to raise in the coming years, for example to support pledges made on NHS funding, every little helps, and if other sectors and individuals are seeing tax rises, their disquiet could be eased by a simultaneous tax increase for the large highly digitalised businesses.
However the Chancellor will be mindful of broader risks and challenges from such a measure. Retaliation from trading partners, and potential WTO challenges (at a time when the UK is expecting to rely much more heavily on the WTO rules) pose broader risks to the UK economy, and a breakdown in international tax relations between countries may scupper the chances of ever reaching the global solution that the OECD is progressing. Closer to home, concerns about the DST being passed onto consumers and small UK businesses, as well as the challenges in crediting such taxes against UK corporation tax could mean higher operational and tax costs for UK businesses (at a time when our global competitiveness will become increasingly important).
Given the potential upsides of action now, perhaps the question we should be asking is “can these concerns be overcome by 29 October?”