Taxing the digitalised economy

ICAEW has responded recently to a consultation from the UK government on Corporate tax and the digital economy and to a European Commission questionnaire on Fair taxation of the digital economy.

The questionnaire responses will be uploaded to the European Commission website in the near future but we also submitted a supplementary paper which we have published as an ICAEW Rep.

You can read our two “responses” on the ICAEW website:

ICAEW Rep 11/2018  Fair taxation of the digital economy

ICAEW Rep 12/2018 Corporate tax and the digital economy

Despite their titles everyone is talking about the digitalised economy and is of the view that there is not a separate digital part of the economy which requires a different tax regime. Nevertheless there is also a recognition that some of the business models which have been developed through digitalisation have enabled some businesses to pay less tax on the value they have generated than other, non or less digitalised, businesses.

How to correct this defect in national, and international, tax systems?

That is one of the most intractable problems facing tax administrations and it is easier to pose the difficult questions than to come up with answers which are not going to lead to double taxation, uncertainty or actions which may stifle innovation and growth.

Some of the main points made in our most recent response to the UK government are:

  • We accept that there is no separate digitalised economy but some of the business models that have been developed do pose significant challenges to existing domestic tax regimes and international tax arrangements;
  • The OECD BEPS (Base Erosion Profit Shifting) Actions which have been agreed and which are being implemented by more than 100 countries, including the UK, will help to provide solutions to many of the problems posed by the digitalised economy but will need time to bed down and have an impact;
  • Digitalisation is a main driver of innovation and growth and if the UK’s ambition to become a global digital hub is to be realised then tax changes need to be properly consulted on and well thought through and reflect the realities of the digitalised world;
  • The value created by users of digital platforms etc need to be better understood as well as mechanisms to measure such value and also take into account the value created by the technology itself;
  • Longer term solutions based on international consensus will be much more satisfactory, and sustainable, than short term approaches and unilateral action.
  • We believe that there needs to be much more careful analysis of the nature of the digitalised economy, the different ways in which particular business models create value and a clear understanding of how to measure such value.
  • There need to be continuing discussions with business and advisers to understand the challenge and test the robustness of any potential solutions.

What next?

There is a current HM Treasury/HMRC consultation on Royalties Withholding Tax for comment by 23 February 2018.

Any reader who has views on that consultation please contact Ian Young as soon as possible so that he can take account of your views in preparing the ICAEW response.

The European Commission is likely to come up with its response, possibly a draft Directive, in the light of responses to its questionnaire which closed for comment on 3 January 2018.

OECD will produce a draft report on the Challenges of the Digital Economy for the G20 Finance Ministers meeting in April and that draft report will be published before the end of that month. This follows a Request for Input last autumn and you can read the ICAEW response and other responses to that Request for Input via our web posting.