It is now over a month since I wrote my blog “We don’t need new digital taxes, we need an international tax system fit for the Digital Age” about the OECD BEPS project which is seeking multilateral consensus to update the international tax system to cope with how modern businesses are run. It turns out that the UK Government does not entirely agree.
The concern of governments, including the UK, is that the current rules allow foreign businesses contracting with domestic customers to pay less tax on the profits generated by those sales. The claim is that some businesses take steps to ensure that only a limited portion of those profits are taxable under current rules.
Although the UK Government helped to kick-start the BEPS process and is committed to the need for a multilateral solution, the timescale of BEPS has meant that the UK has decided it cannot wait for a solution and so it is bringing in a new tax entitled the “Diverted Profits Tax” next April.
This sense of urgency is undoubtedly fuelled by the speed with which digital is changing business. As an example, on 11 December Ofcom issued an International Communications Market Report which highlighted, amongst other things, that the UK has the highest e-commerce spending amongst the major nations surveyed and the highest proportion of online spending. A concern would be that there is a lot of taxable profit which could follow these sales offshore.
One explanation for the UK apparently moving ahead of the international consensus (and which can be reconciled with ongoing support for the BEPS project) is that the UK is just trying to create a tax which anticipates the potential BEPS changes; ie the DPT will become otiose once we move into a post-BEPS world. The tax rate of the DPT at 25% is 5% higher than normal corporation tax and this is indicative of it being a move intended to change behaviour; ie to get businesses to change the way they operate to anticipate the new world.
So far, so reasonable, however, the concerns centre around the risk of retaliatory action by other governments which will adversely affect UK based businesses. As an open economy, heavily reliant upon internationally traded goods and services, there is a significant downside if the DPT encourages a return to the protectionism of the 1930’s.
By the way, although this article is framed in terms of this being a digital tax, it will apply to any business and includes no elements which would restrict it to what is often meant by the term “Digital Businesses” as targeting in this way is contrary to EU rules.
If you want to find out more about the new, please read the blog by one of my partners, Stella Amiss.
So what should businesses (and digital businesses) do?
I would recommend that any UK business (whether UK headquartered or not) which sells internationally, or aspires to, takes a look at these rules. One question would be to consider what effect it would have on them if other governments take similar action; ie they seek to tax profits currently allocated to the UK. Given that this would lead to a reduction in the UK tax, the government officials in HMRC and the Treasury who are currently working on this project would be interested to hear about this.