The Government has launched a new consultation paper which proposes a radical shift to the way the digital economy is taxed. The ultimate aim is for multinational-companies to be required to pay UK tax which is more proportionate to the value which is generated on UK shores:
“It is essential that the international corporate tax rules ensure that their UK corporation tax payments are commensurate with the value they generate from the UK market and specifically the participation of UK users.
…the government will push for reforms to the international tax framework, to ensure that the value created by the participation of users in certain digital businesses is recognised in determining where those businesses’ profits are subject to tax.”
These new proposals are an attempt to help drag the taxation system into a digital age, which does not have the same international borders as before. In recent years, the Government and HMRC have come under increasing scrutiny for its failure to tax technology companies effectively. Facebook has become one of the largest companies in the world, fuelled by user-generated content and made profitable by huge advertising revenues. But despite revenues of £845 million, last year Facebook paid only £5.1 million in UK corporation tax.
The new proposals will specifically address organisations with business models like Facebook and Twitter which are heavily reliant on user-generated value. They would move away from the current practice of taxing these companies based on the profit which they post in the UK, and instead they would be taxed in accordance with the value of their UK user base. This would effectively prevent large enterprises from reducing their tax bill by funnelling sales through other countries.
The consultation accompanies the statement from Philip Hammond in last week’s Autumn statement, where the Chancellor announced his intention to tighten the tax rules for technology companies – particularly those who were using complex accounting arrangements to disproportionately zone UK sales profits into low-tax regions.