The proposed taxation on the digital economy has been a matter for discussion, debate and consultation across the world including in the UK. How the UX tax structure should be redrawn for these requirements and how businesses should prepare themselves have been the focus of these debates.
The position paper issued by the UK on corporation tax and the digital economy in November 2017 was favourable towards an internationally agreed solution, while considering interim measures for raising revenue.
A consultation was also issued on the application of withholding tax on royalty payments made by non-residents to connected entities in a low tax jurisdiction with which the UK does not have relevant treaties. It would only apply for payments related to the exploitation in the UK of intellectual property and certain other rights (payments with UK sources).
In March 2018, an update to the November 2017 position paper was issued, reaffirming the UK’s preference for an international solution while considering interim measures. It also expressed the Government’s position on determining ‘user generated value’ and allocating a portion of residual profit for that value.
‘User generated value’ is derived from the generation of content; the depth of engagement with the platform; network effects and externalities; and contribution to brand.
Steps have also been taken to increase VAT compliance levels for those using online platforms, and the UK is considering the possible automatic deduction of VAT from credit card payments to improve collection.
How should businesses prepare?
The taxation of the digital economy could impact UK businesses in many ways which are still uncertain. It’s worthwhile for them to adopt a risk perspective and consider how they could be affected, which include how IT systems and work processes will cope with new UK taxes and requirements for new information; which jurisdictions sales are generated in and modelling the potential impact of these taxes on business profits and assessing the possibilities from changes in pricing of goods and services; and the implications on the business model of the application of taxes on barter transactions.
Some areas businesses may need to consider on the new UK tax in preparation are the availability of relevant information on exposure to these taxes; identifying the location of users of business platforms; viability of business with the addition of new taxes and changes to pricing structures; competitor activity; impact on supply chains; and interaction with revenue authorities.