The Chartered Institute of Taxation (CIOT) has welcomed the Government’s commitment to ‘value creation’ remaining as the basis to decide where and how much to tax multinational companies. But the CIOT cautions that the Government’s push for reforms to factor in the value created by the participation of users in certain digital multinational businesses – for example by posts on social media platforms – when determining which countries those businesses' profits should be taxed in, is likely to be difficult and controversial.
The CIOT was responding to a Treasury position paper that sets out the Government’s view on the challenges posed by the digital economy for the corporate tax system and its preferred solutions.1
Glyn Fullelove, Chair of CIOT’s Technical Committee, said:
“We welcome the commitment to stick to the existing principles of the international tax system and, in particular, the principle that a multinational group’s profits should be taxed in the countries in which it undertakes its value-generating activities. The UK must continue to push for multilateral action across the globe because unilateral actions by countries inevitably lead to double taxation and a significant compliance burden for businesses and, consequently, risk stifling economic growth and innovation.”
The position paper says the Government will push for reforms to the international tax framework, to ensure that the value created by the participation of users in certain digital businesses is recognised in determining where those businesses’ profits are subject to tax. Conceptually, the CIOT can see the case that, in certain and limited circumstances, new value indicators may have been created by digital innovation, and user participation on platforms where it is central to the business model, could be taken into consideration when deciding how much to tax a company – but valuing user input will be very difficult and likely to result in many disputes between taxpayers and tax authorities.
The CIOT said it expects that the base erosion and profit shifting (BEPS) actions being implemented will go a long way towards mitigating the effect of mismatches and missing elements of the international tax system that some highly digitalised businesses may have been able to take advantage of. The Institute suggests that these changes should be given time to be fully implemented and take effect throughout the international tax system before further changes are introduced, such as those being proposed by the Government around taking into account the value created by the participation of users in digitalised businesses when deciding how much to tax.
Glyn Fullelove said:
“While we understand the conceptual arguments for value being created by user participation in some circumstances, the overwhelming bulk of value creation is likely to be represented by the long term investment in the platforms themselves. This is where the vast majority of profit and taxing rights should be allocated; the attribution of profit to user participation will always be small, and once divided between all jurisdictions where users participate, it will not represent a major source of income for governments in those territories.”
Glyn Fullelove said:
“Given the range of different business models and the changing economy we think it will be extremely difficult if not impossible to design the rules so that they capture the intended targets without also drawing in businesses that are not intended to be effected.”
The CIOT said it cannot be assumed that wherever users provide content/data that it has value and even where it has some value that is often minimal until that data is analysed. At this point, the data is likely to become a more conventional IP asset such as a brand or a client list or know-how. If ‘user value’ is to be used as a distinct factor in profit apportionment, will it need to be disaggregated from the value it adds to, say, a trademark, name or image rights, asks the CIOT.
Notes for editors
1. The Government’s corporate tax and the digital economy position paper can be read here. The CIOT’s response can be seen here.
2. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)More Articles by Chartered Institute of Taxation (CIOT) ...