The UK government embraces the changes brought about by digitalisation. From innovative goods to revolutionary business processes, the adoption and spread of digital technology have contributed to significant increases in productivity, economic growth and consumer choice. The government welcomes these positive trends and the important contribution made to the UK economy by its fast-growing digital tech sector, which employs more than 1.5 million people and accounted for £6.8 billion of investment in 2016, 50% higher than any other European country.
It’s for these reasons the government has set out a strategy for making the UK the best place to start and grow a digital business, and sees this as critical in ensuring the UK is a leader in emerging technologies and highly skilled jobs.
The speed and scale of the changes caused by digitalisation have naturally had implications for the UK tax system.
In some cases, there is scope to try and harness the benefits of technology to make the system more efficient for both taxpayers and tax administration. That’s why the government is releasing further publications at Spring Statement on using split payments to combat online VAT fraud and the role of platforms in encouraging compliance by their users.
Yet unsurprisingly, the scale of change brought about by digitalisation has also posed challenges for tax policy. Nowhere is that truer than for corporation tax, where the development of certain business models has challenged our understanding of how and where companies create value.
At Autumn Budget, the government set out its initial position on this issue. While it continues to support the principle underpinning the international corporate tax system – that the profits of a business should be taxed in the countries in which it creates value – it believes that this principle is being challenged by business models for which value creation is in part reliant on the engagement and participation of users. The government’s view is that the tax system has not kept pace with these changes and that action is needed.
The government has since benefitted from substantive feedback from a wide range of stakeholders, who have offered constructive challenge and insight into this issue. It is therefore publishing an updated position paper to reflect on some of the key questions that came out of that process, and provide an update on the government’s thinking. The updated paper sets out the government’s view that:
• the participation and engagement of users is an important aspect of value creation for certain digital business models, and is likely to be reflected through several channels, such as the provision of content or as a contribution to certain intangibles such as brand.
• the preferred and most sustainable solution to this challenge is reform of the international corporate tax framework to reflect the value of user participation. It is important that the members of the OECD’s Inclusive Framework make progress in developing multilateral solutions, and to assist this process the paper sets out some of the government’s initial considerations on what this could include.
• as set out at Autumn Budget, in the absence of such reform, there is a need to consider interim measures such as revenue-based taxes. The paper explores some of the important considerations regarding the scope and design of an interim measure, and the steps that could be taken to ensure that it is well-targeted and protects start-ups and growth companies. The government still thinks there are benefits to implementing an interim measure on a multilateral basis and it intends to work closely with the EU and international partners on this issue.
This paper does not look to set out the government’s final position on these issues. It instead sets out the government’s updated thinking, with a view to engaging further with businesses and other stakeholders to better understand and resolve some of the outstanding questions.
The government is nonetheless clear that there is a challenge that needs to be solved. The current misalignment between where digital businesses are taxed and where they create value threatens to undermine the fairness, sustainability and public acceptability of the corporate tax system.
The government hopes to find a multilateral solution to this challenge, and believes that the upcoming OECD report and G20 summit in Argentina will be important in setting out a programme of work for achieving that. The government thinks that this paper can help to inform that work, and help to achieve a coherent, proportionate and sustainable long-term solution.
The government’s position is summarised as follows:
- the participation and engagement of users is an important aspect of value creation for certain digital business models;
- the preferred and most sustainable solution is reform of the international corporate tax framework to reflect the value of user participation; and
- in the absence of such reform, there is a need to consider interim measures such as revenue-based taxes.