Opinion Former Article

Digital services tax must be a temporary fix only, says CIOT

The Chartered Institute of Taxation (CIOT) advises that the Government’s planned Digital Services Tax (DST) on digital companies should be a temporary measure and ideally last no longer than five years. The Institute wants the DST repealed as soon as there is a multilateral agreement through the OECD on a global method to tax such companies on the value created by users.

The aim of the UK’s DST is to ensure that digital businesses pay tax reflecting the value they derive from the participation of UK users.

Glyn Fullelove, Chair of CIOT’s Technical Committee, said:

“Given the nature of the tax a pragmatic approach will be required in order for it to be implemented effectively.  This is because revenue taxes such as this are a blunt instrument that cannot accurately represent the tax on the profits related to user based value on all businesses on which it is imposed.  It will inevitably over-tax some companies and under-tax others.

"Many companies will not have the necessary information to arrive at a precise answer to how much DST they should pay.  In practice the Government will have to rely on companies to arrive at a ‘best estimate’ of the amount of the DST payable based on a just and reasonable estimate of the UK revenues liable to the DST.  Given the economic distortions that may arise and the somewhat arbitrary impact of this blunt solution, we would prefer that the measure is expressly time limited to a period of, say, five years."

The CIOT strongly supports the UK government’s aim of a long term reform of the international tax system. The CIOT encourages a re-doubling of efforts to achieve an early consensus on the way forward because we are increasingly facing an international tax landscape of unilateral actions being taking independently by countries.

Glyn Fullelove said:

“Unilateral measures inevitably lead to less alignment of tax bases globally, resulting in double taxation and a significant compliance burden for businesses and, consequently, stifle economic growth and innovation. Multilateral action across the globe is ultimately essential if the aim is to ensure, so far as possible, no double taxation and we hope unilateral measures can be repealed once a global long term solution is agreed.

“In practical terms the DST will be based on estimates provided by the digital business themselves1 and a tax operating in this way could lead to taxpayers with very similar businesses paying different amounts of DST.  In our view this result is only acceptable in a temporary tax.”

The CIOT makes the comments in a submission to a HMRC consultation on the DST which closed yesterday (28 February).2

The CIOT also said that the taxation of user created value ultimately relates to the allocation of taxing rights over the global profits of a business and will not, in itself, raise more taxes overall.  The fact that user created value is not currently taxed in the country of the user does not necessarily mean that the profits attributable to it are not taxed, just that under the current framework the right to tax them rests elsewhere.

Glyn Fullelove said:

“User created value may raise amounts of tax that are worth collecting for jurisdictions that have a large user base. However, it is unlikely to raise amounts that materially affect the country’s finances and a sense of perspective thus needs to be kept when considering whether and when to introduce such legislative change.

“The Government must manage expectations and the public perception of the taxation of the largest digital businesses, the impact of the DST and what it is intended to achieve and what it can achieve.”

Notes for editors

1. The CIOT said it must be recognised that many companies will not have all of the information which would be required to arrive at a precise answer of the DST payable. Although some companies may have sufficient information available to them to provide a detailed method of allocating value/income to users, many will not. The information available to each company will be different and it will come from a variety of sources across the business records and systems of companies. Importantly the figures will not necessarily be subject to audit, if they are not necessary for the production of financial statements.

2. The CIOT’s response to the Digital services tax: consultation can be read here.

3. 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 18,500 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

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