HM Treasury has published a position paper to consider how the international tax framework operates in connection with the digital economy and whether it is flexible enough to deal with the differences in how certain digital business models operate and generate value, compared to more traditional business structures.
The government believes it is essential that the international corporate tax rules ensure that the UK corporation tax payments of multinational groups are in line with the value they generate from the UK market.
The current position:
The key question when looking at multinational groups is what amount of profit should be taxed in the UK compared with the other countries in which the group operates. This is currently determined by an international tax framework which is reflected in the OECD Model Tax Convention and in the double tax treaties between the UK and other countries.
That framework operates:
- Through the transfer pricing rules
- Through the concept of a Permanent Establishment and
- Through the profit attribution rules
to tax a multinational group’s profits in the countries in which it undertakes its value-generating activities, such as where major operating decisions are made and where important assets and risks are controlled. However, for many digital businesses operating through an online platform, the users of the platform (which may or may not be the same as the business’s consumers) play a more integral role creating revenues, profits and material value for a business through their continuing engagement and active participation, and the current framework is not sufficient to ensure that the profits of these businesses are taxed in the countries in which they have genuine economic activities. For example, the government has noted that the provision of a free service such as a search engine in return for data constitutes a value-for-value barter transaction, to which it could be argued a VAT charge should be applied.
The potential solution:
The governments preferred solution is a tax on the revenues that businesses generate from the provision of digital services to the UK market.
Following consultation, the government will therefore introduce legislation seeking:
- To tax profits that multinational groups make from selling products and services to UK customers
- Where those profits have been transferred to an entity in a low-tax country
- Which has been awarded ownership of the group’s intangible assets.
This will be implemented through an extension of UK Withholding Tax to royalties paid to no or low-tax jurisdictions in connection with sales to UK customers. The extension will be applied consistently with the UK’s double tax treaties. It is intended to be an interim solution only pending international reform via the European Commission, OECD and BEPS and Diverted profits tax project. The position paper runs alongside the Consultation: Royalties Withholding tax
The government is requesting feedback on the contents of the paper. Responses should be sent by 31 January 2018.
Links:
Controlled Foreign Companies (CFC)
Consultation: Royalties Withholding tax
Corporate tax and the digital economy: position paper
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