Ahead of the UK Budget this month, the Chartered Institute of Taxation (CIOT) has urged caution from the Chancellor on his suggestion to go it alone with a temporary new sales tax on digital multinational companies.
In recent weeks the Institute has responded to the Government’s Corporate Tax and the Digital Economy position paper and held fringe meetings at party conferences on digital taxation. The Institute is now highlighting the risks from “interim” taxes on the revenues of digital companies.
The CIOT position is that maintaining the existing principles of international tax is the best way to tax global profits, in particular, the principle that a multinational group’s profits should be taxed in the countries in which it undertakes its value-generating activities rather than where it makes sales. The Institute does recognise that the current system is not able to accurately capture the wealth created by users of a digital platform where such users are crucial to the business model of the platform operator. This requires a long term sustainable solution.
Glyn Fullelove, Chair of CIOT’s Technical Committee, said:
“Work towards a multilateral solution continues, and this is likely to take at least another year or two. We acknowledge that the lack of such a long term solution today creates pressures for interim measures. However, in our view, the risks associated with an interim tax on revenues outweigh the potential benefits and could be counter-productive to further discussions on a long term model. We would prefer that the UK refrains from introducing interim revenue taxes, particularly given the OECD has committed to reaching a global, long-term solution within the next couple of years.”
CIOT considers the risks to include:
- If the UK introduces a tax on a unilateral basis, other countries will be encouraged to do the same. Whilst the UK appears to wish to target a relatively small group of multinationals whose business models are heavily dependent on users, other countries may wish to tax a wider range of services, and UK based tech companies may find themselves taxed overseas on profits already taxed in the UK.
- The tax may simply be passed on to customers – it is hard to avoid the conclusion that the suggested digital tax will largely be paid by companies who are dominant in their sectors. Such companies are likely to find revenue taxes relatively easy to pass on to customers.
- The tax may be difficult to apply, leading to disputes - the proposals depend on being able to allocate revenues to territories where users are based. Tracking the numbers of users and where they are is far from simple, and may lead to disputes about the base on which the tax is to be levied.
- A single rate applied to revenues is likely to be a blunt instrument – whilst no specific rate has been proposed by the UK, a rate of 3% was proposed by the EU for a similar EU wide measure; basically this would be likely to tax some companies too harshly on UK value created, and others not enough.
Glyn Fullelove said:
“It is a characteristic of the development of new digital business models that they have led to quasi-monopolies in a number of sectors. Monopolies distort all forms of economic activity, including taxation. Adjusting taxation is not necessarily the best way – and certainly not the only way - to tackle unfairness arising from monopoly. We would caution against introducing an unsatisfactory tax in an understandable attempt to meet the concerns of politicians and the public at large.”More Articles by Chartered Institute of Taxation (CIOT) ...