Taxing businesses in the digital age

20 Feb 2019

The Organisation for Economic Co-operation and Development (OECD), the international body responsible for co-ordinating economic policy, believes the current international tax system is 'no longer fit for purpose' in the digital age. It has opened a consultation, and is inviting comments on its proposed changes to the taxation of digital businesses.

The consultation focuses on taxing profits where they are derived, and reviews the impact of digitalisation on nexus and profit attribution rules. The OECD aims to publish a final report on the matter in 2020. However, certain countries, including the UK, are already implementing their own measures: here, we take a look at these.

The UK's proposal

In the 2018 Autumn Budget, Chancellor Philip Hammond announced a so-called 'Digital Services Tax' (DST) as an interim measure. The DST will apply a 2% tax to the revenues of certain digital businesses. A double threshold will exist, meaning that businesses will have to generate revenues from in-scope business models of at least £500 million globally to become taxable under the DST. The first £25 million of relevant UK revenues will not be taxable.

Under ordinary principles, the UK's DST will be an allowable expense for corporation tax purposes: however, it will not be within the scope of double tax treaties, and therefore it won't be creditable against corporate tax in the UK.

The tax will apply to large search engines, social media platforms and online marketplaces where their revenues are linked to the participation of UK users. The DST is not a tax on online sales of goods; rather, it is a tax on the revenues earned from intermediating such sales.

The government proposes to review the DST in 2025 in order to determine whether it is still needed in light of international developments.

The EU's proposal

The EU previously put forward two proposals for potential implementation by member states by 2020. Firstly, an interim 3% DST was outlined, and secondly, a corporate income tax on firms with a 'significant digital presence' was proposed. The 3% DST proposal, however, was discarded, as it failed to receive the 'required unanimity' needed from all member states. Nevertheless, like the UK, other member states have started to create and implement their own policies.

Italy has enacted a 3% 'Digital Transactions Levy', which took effect from 1 January 2019 for digital services supplied by large businesses. Meanwhile, France, Spain and Austria have recently announced plans to implement their own digital services taxes, based on similar rules as those proposed by the EU.

Developments around the world

Looking further afield, in the US, a Base Erosion and Anti-Abuse Tax (BEAT) has been enacted to impose US tax on certain payments to foreign related parties. The BEAT is not specific to digital businesses: however, the US Supreme Court recently outlined proposals to allow certain state and local governments to start collecting sales tax from online retailers.

Other countries, such as India, have proposed taxing specific types of digital services, such as video-on-demand services and online advertising.

In the interim

The OECD has produced an interim report to take all of this into account, highlighting the challenges and complexities of the issues associated with taxing digital businesses.

External stakeholders have the opportunity to comment on the OECD's proposals before the consultation closes to comments on 1 March 2019. Further details can be found here: https://bit.ly/2tvrvXA.

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