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Digital tax: a virtual certainty?

Posted on 12 April 2018

Digital tax: a virtual certainty?

As part of the Spring Statement on 13 March 2018, the UK government presented an updated position paper on digital taxation, i.e. the taxation of the user-generated value of businesses selling online advertising space, providing digital intermediary activities or selling user-derived data. This follows on from its position paper on the topic published in November 2017. The latest paper provides an update on the UK's thinking on how value is generated by users in the context of digital business. It also provides further detail as to how and where such value should be taxed. In broad terms, the UK government still favours taxing such digital business value in the jurisdiction of the user and seems prepared to unilaterally introduce a digital tax on revenues in the UK in order to achieve this.

There are concerns that such a unilateral approach could cause great uncertainty and may impact investment into the UK, especially against the backdrop of Brexit. The UK government, however, does appear alive to this and makes clear its preference for a wider consensus and a collaborative approach to the challenge of how to tax the digital economy, provided international agreement on the topic can be achieved quickly.

The OECD might provide a global solution to the issue but it is moving at a slow pace, with its next report on the topic not due until 2019. At present it therefore seems more likely that the EU could offer a pragmatic solution which the UK would sign up to (or post-Brexit, follow), given that since the UK paper was published, the European Commission has published two proposals for the consideration of the EU Council and implementation by the EU Parliament by the end of 2018:

  1. An interim tax on revenues generated by 'digital business'; i.e. it  proposed that the new tax would be levied at a rate of 3% and collected by the member state where the users are located, and would only apply to companies with annual worldwide revenues of at least €750 million and EU revenues of at least €50 million; and
  2. A longer term objective to revise the existing concept of a permanent establishment whereby businesses are taxed on profits (rather than revenues) allocated to countries where they have "boots on the ground" and instead create a set of rules that tax a digital presence in the EU where a business has more than €7million of annual revenues in a member state, more than 100,000 users in a member state or over 3,000 annual business contracts for digital services. 

We will be keeping a close eye on developments in this area and recommend that digital businesses above the de minimis threshold should be considering their options if these proposals come into force in their current form.

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