Original announcement

At Autumn Budget 2017, the Government published its position paper on Corporate tax and the digital economy, inviting comments from interested parties by 31 January 2018.

The paper set out the Government’s concerns that the profits of some multinational groups are not being taxed in the countries in which the value is generated. The paper also set out some of the ways in which the Government intends to address the problems created by the digital economy. See the news item for details of the original announcement.

Today’s update

The Government has published an update to this position paper on the 13th of March 2018, following the review of feedback submitted by interested stakeholders, setting out in more detail how it believes the challenges posed by the digital economy can be resolved.

It should be noted that the paper does not set out the Government’s final stance on these matters and the proposals will need to be refined on an ongoing basis in order to meet the policy objectives. It is hoped that the position paper will help to inform the work being carried out by the OECD and the G20 in finding a multilateral solution to the problems identified.

The key aspects of the position paper update are:

  • reform of the international corporate tax framework is the preferred option for tackling the mismatch between the location of value-creating activities and taxable profit. The proposed reforms are based on the principle that profits generated by a business should be taxed in the countries in which value is created. See Chapter 3 of the position paper update for further analysis and illustrative examples.
  • there are several ways in which user participation can create value for online platforms. The concept of a user as opposed to a customer is a step away from the traditional supply and demand framework, and the Government believes it is important to recognise this distinction in creating an appropriate tax framework. See Chapter 2, paras 2.4 to 2.25 of the position paper update for examples.
  • interim short-term options may need to be implemented whilst an international framework is under development, for example revenue-based taxes. It is envisaged that this tax would apply to certain businesses wherever they are located and regardless of their level of physical presence in the UK. The Government recognises that it will be difficult to achieve consensus for the necessary changes, and there are several hurdles to overcome in forming the scope of the tax. However, it hopes the introduction of a revenue-based tax may go some way towards raising additional UK tax from businesses deriving value from UK user participation. This is discussed further in Chapter 4 of the position paper update.

Further business engagement and written feedback is welcomed by the Government whilst these policies continue to be developed.

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