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Showing all posts tagged with Tax

< The beta blog | Nov 5, 2014

We don’t need new digital taxes, we need an international tax system fit for the Digital Age

The ways in which global businesses are taxed has been on the front pages more in the last couple of years than during the whole of the rest of my career combined. There’s a perception that international businesses, particularly those of a more virtual nature, are paying less tax than they ought to. International tax is pretty complicated stuff and so, if they are paying less, this isn’t down to lack of effort on the part of taxing authorities: it’s just that the rules, when properly applied, can give results that many think look odd.

We’re now half way through a project being run by the OECD called BEPS (Base Erosion and Profit Shifting)which has recently issued seven interim reports, with the final eight reports due out in about a year’s time. The first BEPS report was on the Digital Economy and considered whether we need new taxes to deal with the digital businesses which have been getting themselves on the front pages.

So what has this to do with the OECD? Beginning in the 1920s, the nations of the world have established tax treaty networks to eliminate the unfairness of the double taxation that arose on cross-border trade. As the international tax system has become more established, the inequity of double taxation has been reduced, however, the BEPS concern is that the pendulum has started to swing more towards the apparent inequity of non-taxation.

Although the premise of the Digital Economy working party was that there are “Digital Economy businesses” (the ones on the front pages) which need new tax rules, pretty quickly they concluded that Digital just means “using modern communications technology” and, surprise, surprise, all businesses are at it – some just do it better than others. In tax terms, this gets you to the conclusion that an international tax system designed in the 1920’s for the international communications of that time (trains, boats and telegraph) does not cope well with the modern world: hence the title of this blog.

Whilst it will be a year or so before we know where these changes will take us, the Digital Economy report does give a vision as to what the future may look like. It does this by setting out what aspects of the tax rules need to change. At a very high level, the changes would make it easier for a company based in one territory and selling into a second to become liable to taxes in that second territory. There is, of course, a lot a technical detail behind this broad statement.

One of these details is the way in which the Permanent Establishment rules operate (i.e. what threshold of activity needs to be crossed before a company selling from country A to customers in country B has to declare taxable profits in country B).

The draft report of the Permanent Establishment working party has just come out for comment and this gives us a first clue as to whether or not the Digital Economy report contains the blueprint for the future of the international tax system. The number of references to the Digital Economy report (and its recommendations) in the Permanent Establishment draft paper suggest that, yes, the recommendations made by the Digital action group are being taken seriously by the other working parties.

I’m not suggesting that anyone should change their business model and tax arrangements based on as yet unwritten rules (although I would give the matter serious thought if you’re making changes for other reasons), but I do think it’s worth keeping a weather eye out for these changes and doing some simple scenario planning based on the more likely outcomes.

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< The beta blog | May 19, 2014

Banking and the tax challenges in the digital age

The days of the restricted service and availability of the high street bank are gone. Customers expect to transact on an electronic basis of 24/7 availability with more ease of information exchange and processes.

Although the digital age is a driver for change, and not a new approach to tax, tax challenges arise as banks adapt their business models to compete and offer more personalised and targeted services.

Social media provides the consumer with a powerful voice, for example, in raising awareness of tax-related issues. Reputation and public perception is critical as banks strive to compete.

Banks are already incurring substantial spend in developing software to facilitate improved banking services. This spend should benefit from tax incentives (e.g. for R&D) but the question of who owns and benefits from the IP created can give rise to complex tax issues.

The issues of where corporate tax liabilities arise (‘permanent establishments’), withholding tax and VAT are not new in respect of where electronic trading takes place and these will continue to create concerns for banks in the digital age as physical locations blur with the virtual.

Contributors: Rob Bridson

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< The beta blog | May 19, 2014

Why is the technology and digital media start up scene so vibrant in the UK?

Last year, the then Mayor of New York, Michael Bloomberg, identified London as the main threat to New York’s developing tech start-up scene. But what makes the UK such an attractive place for technology start-ups?

Aside from the benefits of great universities, access to finance and available infrastructure, the government has backed these businesses through a series of fiscal measures designed to support innovation and technology, such as the following:

  • Small and medium sized companies can claim an enhanced deduction, for tax purposes, of 225% for qualifying R&D which can be surrendered to HMRC for a cash payment – a vital source of funds for many businesses that have started up without external help or capital (bootstrapped) – and enhanced capital allowances on equipment for R&D.
  • Businesses developing patents can benefit from a 10% rate of tax for relevant intellectual property income.
  • Investors can get excellent income and capital gains tax relief for financing these businesses through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
  • In order to attract talent in a resource constrained business, the Enterprise Management Incentive scheme is a tax efficient way to reward employees through share options.

Apart from technology-specific incentives, the UK will have the joint lowest corporate income tax rate in the G20 from next year and is a great place to do business. In addition, the government provide non-fiscal support to these businesses through such organisations as the Tech City Investment Organisation and UK Trade & Invest.

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< The beta blog | May 19, 2014

Why a PE review is necessary in the digital age

The permanent establishment (PE) threshold test, which is contained in many countries’ tax laws and double tax treaties, determines whether a business has sufficient activity in another territory to create a taxable presence in that other territory from a corporate tax perspective. If a taxable presence is found, the company would be liable to retrospectively register for tax, and be assessed for tax, penalties and interest. The additional tax cost may not always be recoverable in the territory where the company is tax resident.

The existing PE rules were designed many years ago, without digital business in mind. Now many businesses can, and do, operate very remotely geographically from their customer base and there is growing concern from tax authorities that they are not able to effectively tax the economic activity generated by these overseas businesses from the local customer base.

This concern from tax authorities and attention from the media and other stakeholders has led to significantly more focus by tax authorities on this area; both in the application of the existing rules, as well as specific OECD projects considering revisions to the PE threshold test and the taxation of digital business.

For all these reasons the PE issue is becoming a primary tax risk area for multinationals and a PE risk review can form an essential part of a company’s wider tax control framework. Benefits include reduced risk of unexpected tax liabilities and increased readiness in the event of a tax authority audit.

A multi-country PE risk review, can be a cost effective way for businesses to assess this issue and can also be combined with a review of taxable presence from an indirect tax perspective.

Contributors: John Steveni

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< The beta blog | May 19, 2014

The impact of digital technology on transfer pricing

Digital technology has had a substantial impact on the way businesses operate cross-border: it is redefining supply chains and the intangible assets which generate value for a business. From a transfer pricing perspective this change has raised questions about whether related businesses or enterprises are transacting at arm’s length across borders, reporting the correct level of taxable profits in each country, and more fundamentally if the existing transfer pricing guidance is fit for purpose in the modern world. Where a taxpayer’s transfer pricing is challenged, it often leads to the assessment of additional corporate tax, penalties and interest, which may not always be fully recoverable from another tax jurisdiction.

The OECD are working on several projects, specifically reviewing the transfer pricing guidance in relation to intangibles and the taxation of digital business. As a result, there is great uncertainty for some businesses on the continued sustainability of their transfer pricing policies.

Given these changes, for many businesses there is a need to discuss and agree in advance their transfer pricing policies and this can be achieved through the advance pricing agreement (APA) programmes that many tax authorities now offer. Even if a taxpayer does not apply for an APA, they should consider their strategy around uncertain transfer pricing positions.

Contributors: Claire Blackburn

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< The beta blog | May 19, 2014

My Media Company and tax challenges in the digital age

In the digital age, a successful media company will be making big investments in R&D and product development capability and it will be doing this through a globally dispersed but closely networked work force. Executed poorly, this structure can cause real headaches from a tax perspective. Tax authorities everywhere will be looking for additional revenue to tax (with a profits tax, sales tax or withholding tax), whilst arguing that IP development costs sit elsewhere.

The classic approach to managing this conundrum is to centralise. Incur IP costs in one jurisdiction, own the IP there and sell from that location. On the surface, there appears to be a contradiction between the way the business needs to evolve and what makes for sensible management of tax costs. Careful design of internal business models can, however, help to manage this.

It’s important to be clear on who is developing what and for whom. If you want your IP owned centrally, then you need a central team with the right experience and contractual model to commission, own and use IP. When distributing the product back out through the sales channel, the business arrangements must make it clear that it is access to the portfolio which is being paid for, ie unsuccessful projects are still part of the cost base.

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< The beta blog | May 19, 2014

Tax challenges in the digital age – new tax relief for video games development

The Government is aiming to make the UK the technology centre of Europe and has recently introduced a very valuable tax relief aimed at boosting the video games sector. The new relief seeks to encourage additional investment into culturally British video games development in the UK.

Eligible companies can claim an extra tax deduction of up to 100% of their UK costs for designing, producing and testing a game, and a cash credit of up to 25% of UK costs.

A number of eligibility criteria need to be met including a minimum of 25% core expenditure in the European Economic Area, and certification as a culturally British video game, which is assessed based on location and nationality of key staff, as well as content. Assessing whether the cultural test will be met is not always straightforward.

In order to prepare a claim, companies will need to separately identify income, costs and tax adjustments for each game. This can be challenging, but it’s key to get this right as this drives the level of cash credit that can be claimed.

Contributors: Jenny Pearce, Katy Naish, David Turner.

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< The beta blog | May 19, 2014

Tax challenges in the digital age – new tax relief for animation and high-end television production

The Government is aiming to make the UK the technology centre of Europe and has recently introduced a very valuable tax relief aimed at boosting the television sector. The new relief seeks to encourage additional investment into culturally British production of “high-end” television programmes (>£1m expenditure per hour of slot length) and animation.

Eligible companies can claim an extra tax deduction of up to 100% of their UK pre-production, photography and post-production costs, and a cash credit of up to 25% of UK costs.

A number of eligibility criteria need to be met including a minimum of 25% UK core expenditure and certification as a culturally British programme, which is assessed based on location and nationality of key staff, as well as content. Assessing whether the cultural test will be met is not always straightforward.

In order to prepare a claim, companies will need to separately identify income, costs and tax adjustments for each programme/series. This can be challenging, but it’s key to get this right as this drives the level of cash credit that can be claimed.

Contributors: Jenny Pearce, Katy Naish, David Turner.

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< The beta blog | May 19, 2014

Start-ups and early stage businesses – at the heart of digital disruption

For many start-ups and early stage businesses it’s difficult to imagine a non-digital world and whilst you can categorise start-ups across industry lines, you’d be hard pressed to find one that does not incorporate the digital ethos in its business model e.g. retail – sales through e-commerce platforms; financial services – disrupting traditional ways of moving money and investing through core technology or the use of digital platforms; entertainment and media – the development and dissemination of content through digital means, and so on.

This throws up challenges of its own. Start-ups in a digital world need to be agile and move quickly to take their ideas to market. In many cases they need to be international from Day 1, which means navigating complex tax, accounting and legal frameworks which may not be fit for purpose for a digital world. They want to attract the right people to grow the business from a technology and a commercial angle and they have to do all of this on severely constrained budgets. This is not an easy task and the success stories we see in the news every day are testament to the hard work and perseverance of the entrepreneurs and teams behind these businesses.

What does this mean to more established businesses – how do they deal with the threat that start-ups pose to the traditional way of doing business? Do they embrace innovation through partnering with or even acquiring these businesses, or do they fight against the change which, in many cases, may be a losing battle as the use of technology will only continue to accelerate?

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< The beta blog | May 19, 2014

Retail and tax challenges in the digital age

The retail experience is undergoing rapid transformation. First it was online shopping, then multichannel and now total retail – a focus on the customer to provide a smooth shopping experience however they buy, supported by internal systems and processes which can communicate and act accordingly. Retail has grown up and tax authorities are growing increasingly interested in where they make their money.

The convergence of channels, typical in our increasingly globalised world that the digital age has hastened, highlights the need to understand and balance a number of factors. At a broader level, we’re seeing the importance of balancing commercial developments with tax laws and practice. Currently, retail businesses are taxed on a channel by channel basis – to look at a converged channel means re-examining the whole supply and value chain for tax purposes. If you spend to improve your flagship bricks and mortar stores in certain locations, and your on-line sales benefit as a result, how are the locally-incurred costs allocated to the income generated? If you want to make it easy for a customer to buy goods through one channel and return it through another, how are the VAT implications, and any warranty obligations, dealt with? If shop assistants in one territory use tablets to order online when the goods and sale are not in that territory, is there a risk that this creates a taxable presence where the goods are located (permanent establishment risk)?

At a more detailed level, within the sphere of tax, the digital world requires a different level of focus and increased complexity and attention. For retailers operating outside the EU, for example, it’s important to understand and manage the interaction between transfer pricing and customs duties. Where retailers need to move stock more nimbly to satisfy international demand, making sure they secure maximum sales at full price, the tax impact of every cross-border movement will have to be dealt with.

Retailers will be thinking through how to balance the increasing commercial complexity, additional systems requirements and associated tax risk. Changes in the way digital companies are taxed are on the way and retailers will want to know, understand and manage their risk areas, for example through considering advance pricing agreements with tax authorities, procedures for flagging potential permanent establishments, and reviewing VAT and customs procedures.

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