U.K. Treasury ‘Ready’ for More Internet Company Tax Measures

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By Ben Stupples

The U.K. Treasury announced it is prepared to take more individual action over the taxation of internet-based companies, in a warning shot for countries to find a common solution on the issue.

In a Nov. 22 position paper on the tax treatment of the digital economy, the Treasury said it “stands ready to take unilateral action in the absence of sufficient progress on multilateral solutions.” The Treasury said it will push for global tax reforms to ensure the value that users of digital companies create is recognized in the allocation of their profits. As it awaits this reform, the Treasury will explore ways of taxing digital businesses with U.K. users, it added.

Published alongside the U.K.’s Autumn Budget, the Treasury’s paper comes amid the OECD’s efforts to rework tax policy on internet-based companies. With their virtual presence, these companies can often fall outside traditional tax laws. The Organization for Economic Cooperation and Development is set to deliver a report on the taxation of the digital economy to the Group of 20 next April.

The government is “sending out a signal,” Bill Dodwell, partner and head of U.K. tax policy at accounting firm Deloitte LLP, told Bloomberg Tax. “Having said that, it’s a pretty soft signal as the government is fully aware of the risks” of taking individual action.

Diverted Profits Tax

Any measure would come on top of the action the U.K. has already taken on the digital economy.

In 2015, the government introduced a diverted profits tax amid concern that Google parent Alphabet Inc. and other global tech companies were cutting their tax bills by shifting profits to offshore havens. The measure allows a 25 percent levy—higher than the country’s 19 percent corporate tax rate—on profits the government decides have improperly avoided U.K. tax.

At the time, the new measure sparked controversy as the U.K. took individual action amid the OECD’s first attempts to find a common policy on the digital economy. In July 2017, though, Australia enforced a measure similar to the U.K.’s diverted profits tax, with higher penalties.

This year, London Stock Exchange Group Plc, U.K.-based drinks company Diageo Plc, and U.S.-based WiFi product-maker Netgear Inc. have all faced DPT inquiries from the U.K.’s tax authority.

2017 Budget Measures

While the Treasury considers further ways to tax digital companies, it also introduced anti-avoidance measures in the Autumn Budget that will affect all forms of multinational businesses.

These measures included:

  •  An immediate restriction on relief that a company’s overseas branch receives on foreign tax. This measure will only apply, though, when the business has already received overseas relief for losses of the branch, ensuring that the company doesn’t get tax relief twice on the same loss;
  •  A withholding tax from April 2019 on payments to tax havens that are linked to U.K. customers.

The last measure will raise around 200 million pounds ($266 million) a year, Chancellor of the Exchequer Philip Hammond told lawmakers in the House of Commons in his budget speech.

“It was pleasing to hear the Chancellor reaffirm support for the work of the OECD and tackling problems such as the taxation of digital companies on a global basis,” Jonathan Riley, partner and head of U.K. tax at accounting firm Grant Thornton, said in a Nov. 22 statement.” The change to the taxation of royalties, albeit modest in terms of yield, gives an indication of future direction of travel.”

“The main point here is that you can’t put intellectual property in tax havens anymore,” Dodwell told Bloomberg Tax. “You’ve got to put it in a place where you have real people.”

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@bna.com

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