CIOT Urges Restraint From Digital-Tax Policymakers
The Chartered Institute of Taxation, the UK tax professionals representative body, has urged lawmakers globally to pause for thought on the direction being taken on the taxation of the digital economy.
It is urging that any measures to improve the tax rules covering the digital economy must be developed and implemented in a coherent manner, urging also that countries should tax only companies’ profits not their turnover.
The organization’s comments come amid consideration of policy options separately by the European Union and the OECD.
It said it has concerns at the potential application of a withholding tax to digital transactions and “equalisation levies” (revenue-based taxes). It said these would lead to greater complexity, potentially the double taxation of the same profits, and inhibit innovation.
The OECD recently held a consultation on options for further reform of tax rules internationally on how companies transacting with consumers online can be more effectively taxed. On September 22, 2017, it released a request for input on further work on base erosion and profit shifting Action 1, on addressing the international tax challenges raised by the digitalization of economic activities. It was released shortly after ten EU countries, led by France, Germany, Italy, and Spain, threw their weight behind the concept of an “equalisation tax” on digital companies that are subject to a low tax burden or an alternative measure.
The OECD’s “Final Report” on BEPS Action 1 report, on addressing the tax challenges of the digital economy, was published in October 2015. It recognized that digitalization, and some of the resulting business models, present challenges for international tax policymakers. However, the report also acknowledged that it would be difficult, if not impossible, to “ring-fence” the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalization.
In the context of direct taxation, the 2015 report considered a new tax nexus concept of “significant economic presence,” the use of a withholding tax on certain types of digital transactions, and a “digital equalisation levy.” None of these options was recommended for adoption, although it was acknowledged that countries could introduce any of these options in their domestic laws as additional safeguards against BEPS, provided they respect existing tax treaties and international obligations. Instead the OECD recommended that other areas of its BEPS Action Plan would address the digital economy, such as Actions 3, 6, 7, and 8-10, and put forward indirect tax proposals instead. However, the OECD is now revisiting the work on direct taxation, which has seen increasing focus from the EU and the OECD has specifically expressed concerns about the EU diverging from international action to tackle base erosion and profit shifting by potentially unilaterally implementing measures to tackle the tax challenges of the digital economy.
John Cullinane, CIOT Tax Policy Director, said: “There are reforms already underway and agreed through consensus by countries which attempt to address the taxation of all multinational companies, including those usually thought of as ‘digital.’ We urge governments to hold their nerve and make sure these agreed reforms work and have a wide take-up before attempting further fixes that risk upsetting attempts at global solutions. Digitalization should be encouraged as a driver of innovation and growth. Changes to taxation should seek to ensure that this innovation and growth is not discouraged or inhibited by a fear of double taxation.”
“Withholding taxes and taxes on revenue such as equalisation levies are blunt instruments that are likely to give rise to double taxation and may risk stifling innovation as taxes may become payable before profits are made.”
The CIOT said it appreciates the reasons behind asking whether a company can have a “digital presence” in a territory. However, the starting point for profit attributable to a country where a sale is made but there is no physical presence, should be zero, it said, stating that the value of the item in a market is not changed by its mere sale.
Cullinane explained: “In order for a digital presence to be recognized, a factor beyond simply making a sale would need to be identified; doing that may not be straightforward, and even where it could be done, could lead to an administrative and compliance cost disproportionate to any tax collected.”
Cullinane said: “CIOT is supportive of initiatives internationally to ensure tax is paid where value is really created. We want to see a level playing field for all taxpayers, wherever they come from and whatever their size. Sales into one country generated by activity in another are as old as the existence of internationally traded goods, and long predate the internet.”
The CIOT said it sees merit in work on considering whether the definition of and attribution of value to supply chains with a significant degree of digitalization can be improved. However, it said this can be done within the existing framework, which include safeguards to prevent double taxation of the same profits, and dispute resolution mechanisms.
“Multinational companies’ profits are a source of a lot of tax globally and countries such as ours, which are very exposed to international competition, nevertheless succeed in getting a good deal of this. International cooperation to plug gaps is improving and a great deal of the perception to the contrary is now due to what happens in one jurisdiction, the US,” Cullinane continued. “The US tax system is now unusual in effectively allowing multinational companies based in the US to shelter much of their profits offshore. To this extent it can be argued that any material loss of tax is at the expense of the US exchequer, and only by reference to the relatively high US headline rates. Nevertheless, this ought to be tackled; and we take some comfort that the latest proposals for tax reform in the US indicate that this will happen. It is very important for the integrity of the international tax system that there is delivery on this, otherwise the clamor for other fixes will only grow.”
