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UK warned against unilateral 'digital tax'

Taxing technology companies on their UK revenue, rather than profit, would be "fraught with problems", particularly if imposed without international agreement, a tax expert has warned.28 Feb 2018

Eloise Walker of Pinsent Masons, the law firm behind, was responding to comments made last week by Mel Stride, financial secretary to the UK Treasury. Stride told the BBC that a revenue tax was the Treasury's "potentially preferred route to go" in response to last year's consultation on taxation and the digital economy.

Walker said that while the idea behind a revenue tax was a "crowd pleaser" which would "appeal to the media", designing such a tax would be extremely difficult.

"Take digital advertising revenue, for example: should this be determined based on the number of people who see the advertisement, click on the advertisement, or who actually buy the product?" she said. "And how would you work out if those people are in the UK, or in France, or Germany?"

"How do you take into account costs – is anything going to be deductible from that revenue figure, or are we looking at a VAT-style turnover tax? If it's the latter, it's really going to end up being a tax on consumers. Most worryingly, what effect would this have on the UK's relations with other countries?" she said.

In his BBC interview, Stride said that the digital age had created "a type of model of business where it's actually difficult, using existing tax rules, to actually apply what most people would feel was a fair level of tax to those businesses".

"At the moment, [these businesses] are generating very significant value in the UK, typically through having a digital platform with lots of users interacting with that platform. That is driving a lot of value, so you're looking at social media platforms, online marketplaces, internet search engines - where at the moment the tax regime is not taxing those activities fairly," he said.

Stride said that although the government was keen to work with international partners on a new model, it was also prepared to "unilaterally enter into various changes" if this was not possible.

Consultation on a UK government paper on corporate tax and the digital economy closed at the end of January. The paper, published alongside the Budget in November, set out potential short, medium and longer term solutions to the increasingly difficult political problem of how to make sure that digital businesses pay their "fair share" of tax, based on the concept of "user-generated value".

The paper suggested the introduction of a revenue-based tax as an interim measure, although it raised a number of potential issues. These included the difficulty in accurately capturing value, issues around double taxation and the risk that, in the early years of a digital business in particular, a sales tax would risk being an additional burden on a loss-making business.

The European Commission will publish its own plans to overhaul corporate taxation for the digital economy next month. EU tax commissioner Pierre Moscovici said that the Commission was keen to avoid a "disorderly outcome" of "uncoordinated national 'patches' and solutions" by member states, many of whom were "becoming increasingly frustrated at their inability to tax the high volumes of digital activity within their borders".

Tax expert Eloise Walker stressed that tax changes of the nature proposed by Stride in the interview required internationally coordinated action.

"Mr Stride means well, but he has repeatedly been told by various industry bodies that it is not a good idea for the UK to go solo on this," she said.

"If we want to change the whole international tax system, we need to leave it to the OECD and other international bodies to look at properly, and then get the G20 and others on board - otherwise, expect retaliation," she said.