Last week, the Financial Secretary to the Treasury, Mel Stride MP, raised the prospect of changing the way that the UK taxes digital businesses in order to impose a “fair” rate of tax on businesses that are “generating billions of pounds worth of value in the UK”, but not contributing in a similarly generous manner to the country's tax take.
Faced with this position, the UK Government has indicated its initial preference for a tax on the turnover of such companies – with potentially sizeable repercussions for the world's biggest tech firms.
At its core, the issue focuses on those businesses that have a very low physical presence, and which instead generate their value from intellectual property and/or data, including those transacting solely on internet platforms.
Unlike some of the discussions of the past, this is not about companies avoiding tax, but instead about which government should charge tax on their profits. The UK government is arguing that sales made in the UK should allow the UK to tax more of the profits than under the current tax regime.
The UK is not the only country considering this. Back in 2015, the OECD and G20 concluded that there is “no such a thing as a separate digital economy, but that companies are now participating in the digitalised economy”. Given this, it argued that the other changes it was recommending to be made to the international tax environment would also address the digital economy challenges.
However, as Mel Stride's comments show, this view is increasingly being challenged. The European Commission is acting quickly, detailing a number of both short and long-term proposals, which it is expected to report next month. This is all likely to increase the pressure on the OECD, which is due to report to the G20 with ideas before its meeting in April.
So, what could be the way forward? This is not an easy question, as shown by how long this has been under discussion. It’s in this environment that the idea of a turnover tax has been floated.
Some nations have already moved ahead. Italy’s 2018 Budget, for example, introduced a new 3 per cent “tax on digital transactions” on businesses with more than 3,000 such transactions - referred to locally as the “Web Tax”.
But turnover taxes are not generally liked by policy makers or businesses, and for good reasons. Generally, the argument for a turnover tax is that it can be a proxy for the profits that are made on sales. But making sales isn’t the same as making profit, particularly when you consider the high number of loss-making startups in this space.
Secondly, there is also the fact that setting a “one size fits all” rate or approach - one that remains fair to all the different digital business models that it will need to cover - will be difficult. The margin in businesses varies significantly. Indeed, in another context, HMRC has estimated that the margin of food retailers is less than a third of financial services firms.
With such variations, a tax at one rate that might be deemed fair to some would be penal to others. For low margin businesses, a high rate might make sales unprofitable and result in prices having to increase.
Thirdly, the fact that turnover taxes can be penal in nature could undermine the potential to invest, or even halt sales in particular markets.
Despite the challenges with turnover taxes, this appears to be where governments are now focussing, as demonstrated by the Italian example. The prospect of international agreement seems distant, despite all the interest in the topic, but businesses will need to prepare for the prospect of change and remain agile in this new environment.
One thing is for sure: for an issue that had largely floated into the background since 2015, the debate on digital taxation is moving at a disruptive pace. Let’s hope this disruption does not result in an impediment to the amazing technological progress we have seen recently.
Chris Sanger is Head of Tax Policy at accounting firm EY
This article was originally published by WIRED UK
