Taxation of the Digital Economy – Changes are Coming

There is broad agreement between global Tax Authorities that the means by which companies in the digital sector can be subject to corporate tax in overseas territories has not kept pace with the manner in which many multinationals today generate profits across multiple locations.

Specifically, current international rules make it difficult to apply tax on companies which generate income from customers in a particular territory, but without any need for employees or premises to be in that location. Current tax principles generally require some form of physical presence overseas to enable the Authorities to pin a corporate tax liability onto the entity.

This is a matter which has been high on political agendas for some time, and we are now seeing tangible movement in the direction of change.

Towards the end of 2017, HMRC published a paper which went into some depth as to the UK’s position on this matter. In addition, HMRC have published a consultation to seek opinions on tackling one particular issue which they perceive as being a gap in the international tax rules.

And HMRC were not the only ones looking at this from the purposes of their own domestic interests – various other Tax Authorities were doing exactly the same.

Concerned that EU Member States would implement their own unilateral measures, in March 2018 the EU published a number of measures aimed at ensuring a more fair taxation of digital businesses within the EU. This includes an interim measure, being a 3% Digital Tax on revenues, and a longer-term solution, introducing the concept of a ‘digital Permanent Establishment,’ which could give rise to overseas tax on profits generated from that Digital PE. These measures would not affect every company, as they both have certain thresholds built in, under which the proposed changes would not apply, but they would represent a fundamental shift in policy.

Alongside the EU proposals, the OECD also in March 2018 published their position paper. Interestingly, contained within it was their recommendation against interim measures!

It is clear that this is a complex subject which is receiving a lot of attention. There is political pressure on domestic Tax Authorities to introduce measures to tackle the matter, but this is weighted against pressure from the EU and OECD, who seek uniformity on the change – but as can be seen, with varying ideas as to how this ought to be achieved.

Change is certainly coming, but at this stage, it is unclear what shape it will take. Companies involved in the digital sector ought to be aware of the ongoing consultations and be properly advised as to the future impact on their business.

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