The speed and scale of the changes caused by digitalisation have had implications for the UK tax system especially in respect of corporation tax, where the development of certain business models has challenged the understanding of how and where companies create value and ultimately how that value is taxed.
At the Autumn Budget 2017 the government set out its initial position on the issue underlining the principle which underpins the international corporate tax system that the profits of a business should be taxed in the countries in which value is created. The government were concerned that this principal was being challenged by certain digital businesses and the paper published in November 2017 sought to address that question, by assessing three possible challenges that have been put forward:
Multinational avoidance – Whether there are characteristics of digital businesses that increase the opportunities for cross-border avoidance and allow for arrangements that shift profits away from countries in which value is created;
Remote sales – Whether the principal of the international tax system is being undermined by the ability of digital businesses to generate revenues from markets in which they have limited physical presence;
Unrecognised user-created value – Finally the paper considered whether the international tax rules were flexible enough to accommodate digital business models and take account of the way in which certain digital businesses generate value.
Having obtained opinion from a wide range of stakeholders, the government has today published an updated paper as part of the Spring statement 2018 which, although it does not set out the government’s final position, provides an update on their thinking. This includes setting out a more detailed explanation of how user participation is considered to create value for certain digital businesses, how user-created value can be brought within the international tax rules and further thoughts on the interim measure to tax revenues of digital businesses deriving significant value from UK user participation.
The government intends to continue engaging with businesses, the Inclusive Framework and the EU, to discuss the issue and work towards a proportionate and effective policy solution. Stakeholders are invited to present written feedback.