National digital services taxes should only be stopgaps

National digital services taxes – like the UK proposal for which legislation was published today, and the French proposal which passed the country’s Senate today – should only be temporary stopgaps ahead of the forging of an international consensus on how the digital economy should be taxed, says the Chartered Institute of Taxation (CIOT).
CIOT President Glyn Fullelove said:

“We understand why governments like those in the UK and France are attracted to a tax on the revenues of large digital companies. However uncoordinated unilateral measures like these will inevitably lead to less alignment of tax bases globally, resulting in double taxation and a significant compliance burden for businesses. As the reaction of the US government and Congress has shown, they are controversial and could lead to retaliation. Better for governments to work together than risk getting into tax wars.”

Draft legislation for the UK Digital Services Tax (DST) was published today for consultation with a view to legislation being enacted in the next Finance Bill. It would introduce a new 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users, taking effect in April 2020. It does not seek to tax digital sales more generally.

Glyn Fullelove continued:

“We welcome the UK government’s reaffirmation today of its commitment to continue working through the OECD and G20 to seek global agreement on the taxation of digital companies, and that when this is achieved the UK Digital Services Tax will be abolished. We also note that the draft legislation commits HM Treasury to a review of the DST by the end of 2025. Given the economic distortions that may arise and the somewhat arbitrary impact of this blunt solution, we would prefer that the measure is expressly time limited to a period of, say, five years, and in any event hope that it will be in place for as short a period as possible.

“Given the nature of this tax a pragmatic approach will be required in order for it to be implemented effectively. This is because a revenue tax such as this is a blunt instrument that cannot accurately represent the tax on the profits related to user based value on all businesses on which it is imposed.  It will inevitably over-tax some companies and under-tax others.

“Many companies will not have the necessary information to arrive at a precise answer to how much DST they should pay. The government recognises that it will have to rely on companies to arrive at a ‘best estimate’ of the amount of the DST payable based on a just and reasonable estimate of the UK revenues liable to the DST.

“The amounts expected to be raised from DST will not materially affect the country’s finances and a sense of perspective thus needs to be kept. The government must manage expectations and the public perception of the taxation of the largest digital businesses, the impact of the DST and what it is intended to achieve and what it can achieve.”

Notes for editors

1. The legislation was published today, see here.

2. The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 18,400 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
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