U.K. Adds Streaming Services, Virtual Reality to Tax Review (2)

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By Ben Stupples

The U.K. Treasury has widened the scope of its review into taxation of digital sector business models in a move that shows the British government trying to keep pace with technology.

In a March 13 update of its November 2017 policy paper on taxing internet-based businesses, the Treasury cited digital content providers, like Netflix Inc. and Spotify, as an area of focus. It also highlighted new business models based on artificial intelligence or virtual reality.

The government is looking at the “whole market issue” of the digital economy, Bill Dodwell, Deloitte LLP’s head of U.K. tax policy, told Bloomberg Tax. “What’s the profit-making apparatus here? That’s what the government’s looking at, and it’s trying to pick up every instance of it,” he added.

The wider scope comes as governments worldwide try to modernize their tax laws for internet-based business profits.

In the Treasury’s update, published as part of the U.K.’s Spring Statement, the government outlined plans for a sales levy on technology companies as an interim measure to make them pay “fair” taxes.

“There is a need to continue examining business models, to ensure any tax measure is targeted at businesses for whom user participation represents significant contribution to value creation and to consider how to deal with nuances between and within different business categories,” the paper said.

The country’s technology industry lobbying firm, techUK, which represents over 950 companies, welcomed the detail in the updated policy paper amid the industry’s concerns about facing further tax measures.

“This is a highly complex issue and it is important that Government takes into account the risk of unintended consequences that could result from moving to a revenue-based tax approach,” techUK Deputy CEO Antony Walker said in a March 13 statement. “However, it remains the case that international cooperation and coordination are key,” he added.

Existing Measures

Ahead of the U.K., India and Italy have already imposed revenue-based taxes on digital companies in the past two years.

The European Commission and the OECD, meanwhile, are to publish interim reports on how to reform taxation of the digital economy by the end of next month. The Organization for Economic Cooperation and Development is to deliver its final report on taxation of the digital economy in 2020.

In its policy paper update, the Treasury said that a sales tax on the revenue of internet-based companies is only a temporary solution, and that it would prefer to introduce the tax alongside other countries.

In the November 2017 paper, the Treasury originally focused on the business models of internet-based companies that have a clearer link with how their users generate their profits.

Facebook Inc. and Alphabet Inc.’s Google fit the Treasury’s description in the paper of a “social media platform that generates revenue through directing adverts at U.K. users who use a free online platform.”

Airbnb Inc., meanwhile, falls in line with the categorization of an “online marketplace that generates revenue through matching suppliers and purchasers of a good in return for a commission.”

Uber Technologies Inc. fits the Treasury’s description of “a collaborative platform that charges a commission for bringing together supply and demand for assets and possessions owned by individuals.”

Commercialized Data

While their sectors range from London taxis to Los Angeles vacation homes, all the internet-based businesses outstrip traditional tax laws through their commercial use of customer data. As a result, theses companies can make significant user-generated profits that currently go untaxed.

This lack of taxation “needs to be addressed,” the Treasury paper said.

Governments need to consider the link between user activity and the profits of internet-based businesses, and how the taxable profits are allocated between countries, it added.

In the past three financial years, Google has paid 138 million pounds ($182 million), the most corporate tax out of the four U.S. tech giants who will face the revenue levy, according to data compiled by Bloomberg Tax.

Facebook paid the least in the same period, meanwhile, largely due to an 11 million-pound ($15.3 million) tax credit the Menlo Park, Calif.-based company received in the 2015 financial year.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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