Update for members on tax and digitalisation

The economy is changing with the increasing adoption of digital technology by businesses and consumers. Digital business models (whether adopted by new or existing companies) are driving this change and these new ways of doing business are raising questions about the way businesses are taxed globally.

Creating a stable tax environment

Modernising the international tax framework in light of the increasing digitalisation of the global economy is a challenge for governments and businesses within and outside of the UK. Businesses, and the millions of customers they serve, need to have a stable and consistent framework for raising tax in a broad based and non-distorting fashion in the many jurisdictions in which they operate.

The CBI supports the need for reform to the international tax system, in particular to address the political momentum for governments to adopt unilateral measures in response to the impacts of digitalisation. These uncoordinated unilateral measures create economic distortions, reduce investment and growth and significantly increase the risk of double taxation and uncertainty for business.  The CBI considers that the Organisation for Economic Cooperation and Development (OECD) is the right organisation to lead reform in this area - at the time of writing there are over 125 countries working together to develop a consensus-based solution.

An update on recent developments

Following numerous developments in 2018, which included the OECD, European Commission (EC) and UK Government all publishing updated proposals attempting to answer the question of how to tax the ‘digital economy’, 2019 has continued to be just as eventful.

2019 has seen numerous developments in this area:

• The OECD has published a consultation on addressing the tax challenges of the digitalisation of the economy. This has seen a shift in the debate from how to tax ‘digital companies’, to how to deal with the tax challenges that arise from ‘the digitalisation of the economy’ - with this comes the potential for fundamental change in the international tax landscape and how multinationals are taxed globally.
• The UK Government (at Spring Statement) reconfirmed its commitment to introducing a UK Digital Services Tax (DST).
• The EC has put on hold (for now) its plans for an EU-wide digital tax and will instead focus on the work being undertaken at the OECD level.
• In light of recent progress at the OECD, some countries are starting to announce that they are putting on hold their unilateral measures (including Australia).

However, whilst the OECD, European Commission and most governments (including the UK) hold the position that an international agreement is preferable, the growing domestic political pressure is leading some to introduce unilateral measures targeted at digital companies (including the UK).

UK Announcement of a Digital Services Tax October 2018

• At the 2018 Autumn Budget, the UK Government announced the introduction of a Digital Services Tax (DST). During his 2019 Spring Statement, the Chancellor reconfirmed the government’s commitment to the introduction of the DST.
• The DST would tax the revenues of three different types of business model: (1) search engines (2) social media platforms and (3) online marketplaces.
• The UK Government ran a consultation on the detailed design and implementation of the DST from November 2018 – February 2019.

The CBI Response

The CBI responded to the UK government consultation on the detailed design and implementation of a UK Digital Services Tax - highlighting members’ concerns of the UK going it alone and introducing a unilateral revenue-based tax. Such taxes have the potential to create market distortions and double taxation to name just a few issues.  The CBI also continues to raise concerns about the indirect impacts of the DST on both businesses, and on consumers, and undertook a member survey to evidence these concerns. The survey results showed there was scope for the indirect impacts to be significant, and we have called for the government to undertake an economic impact assessment on the introduction of a UK DST.

OECD Consultation February/March 2019

• The OECD released a consultation document on ‘addressing the tax challenges of the digitalisation of the economy’ in February 2019 followed by a public consultation at the OECD in Paris in mid-March 2019.
• The OECD consultation document considered four proposals (which sit under two pillars) put forwards by countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Inclusive Framework has agreed to explore each of these proposals on a ‘without prejudice’ basis as they work towards reaching a long-term consensus-based solution by the end of 2020.
• Pillar 1 focuses on the allocation of taxing rights and how the current rules which allocate taxing rights between jurisdictions may be amended to take account of digitalisation. Three proposals are being considered based on the concepts of 1) user contribution; 2) marketing intangibles and 3) significant economic presence.
• Pillar 2 focuses on a global anti-base erosion rule to address scenarios which may enable multinationals to shift profits to no or low tax jurisdictions.

The CBI Response

The CBI responded by highlighting that the priority for members is delivering a long-term solution, that has broad consensus from a number of countries, to provide a stable and certain international tax environment. Within any solution, it is of fundamental importance for our members in the design of any change to the international business tax framework that it must be a tax based on profits, not revenues, and must only subject those profits to tax once.

European Commission Proposal

• The Economic and Financial Affairs Council of the EU (ECOFIN) has not managed to reach unanimous agreement on an EU-wide Digital Services Tax or a reduced scope digital advertising tax following continued opposition by a number of Member States.
• It was confirmed following the March 2019 ECOFIN meeting that the EC would put on hold its plans for an EU wide digital tax and instead focus on the work being undertaken at the OECD level.
• A number of EU member states have announced unilateral measures, including France, Spain, Italy and Austria (alongside the UK).

Next Steps:

The CBI continues to engage with stakeholders including HM Treasury, the OECD and business federations around the world to highlight the key issues for our members in respect of this policy area.

The rest of 2019 is anticipated to be just as eventful as the first quarter:

• The UK Government is due to publish a summary of responses to the DST consultation
• Updates from the OECD on their detailed programme of work are expected in the summer and Pascal Saint-Amans (Director, Centre for Tax Policy and Administration, OECD) is attending the CBI Tax Committee in June to listen to member views
• The OECD is expected to run another consultation on the detailed design of the proposals to address the tax challenges of the digitalisation of the economy later in the year.

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