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UK clarifies position on 'revenue-based' digital tax

Reforming the way multinational technology and digital businesses are taxed should predominantly be an international effort, the UK government has said.15 Mar 2018

In this week's Spring Statement economic update UK chancellor Philip Hammond said that he was "look[ing] forward to discussing this issue with G20 finance ministers" at a planned meeting in Buenos Aires this weekend. However, an updated position paper from the UK government (38-page / 518KB PDF) makes it clear that it is willing to act unilaterally on an interim basis in the absence of international agreement.

"The preferred and most sustainable solution to this challenge is reform of the international corporate tax framework to reflect the value of user participation," the Treasury said in its paper, which updates its original thinking on digital taxation published alongside the Budget in Autumn.

"However, the UK equally stands prepared to act alongside a smaller number of like-minded countries, or unilaterally, in the absence of sufficient progress," it said.

The paper sets out a number of potential approaches to the design of a revenue-based tax, and attempts to address potential challenges. These include the need to identify where the user of a digital service is based for the purposes of defining revenue in scope of the tax, how tax should be administered and collected, and how to minimise its potential impact on start-ups and loss-making companies.

The government emphasised that the paper did not set out its "final position on these issues", but rather should be used as a starting point to "help to achieve a coherent, proportionate and sustainable solution", ideally in collaboration with international partners.

The paper proposes three potential ways in which digital businesses could be taxed on the concept of 'user-generated value'. The first would be based on the channels through which user participation creates value for the business and apply to those businesses for which those channels are most relevant on a case by case basis. The second would be based on category of business, for example social media platforms, search engines or online marketplaces. The third would be based on potential revenue streams, such as online advertising or facilitating third-party transactions.

To get around the potential repercussions of a revenue-based tax for start-ups, the paper proposes setting a high 'de minimis' threshold, based on the business' consolidated global revenue as well as revenue attributable to UK users. This would ensure that the tax targeted larger businesses, "for whom the benefit derived from user participation is greatest and thus the mismatch between value creation and location of taxable profit is most extreme". Alternatively, the UK could explore different tax rates or possible 'safe harbour' mechanisms as part of the design of the tax.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, warned previously that the design of a revenue-based tax would be "fraught with problems" for the UK, particularly if imposed without intentional agreement. Issues such as user location, calculating value added and whether to take costs into account would all have to be considered, she said.

The European Commission is expected to publish its own plans for a "three-pronged" digital tax based on revenue next week, according to the Financial Times (registration required). The tax, which would be imposed on the largest businesses based on global turnover and revenue generated in the EU, would be levied on advertising revenue, user fees and the income made from selling user data to third parties, the FT said.