UK: The UK Government's Spring Statement

The Chancellor of the Exchequer delivered his first Spring Statement on 13 March 2018. As much of the United Kingdom Government's substantive taxation measures will, as announced last year, be introduced in an Autumn budget, the Spring Statement contained very few substantive taxation measures.

However, a number of public consultations, "calls for evidence" and other documents were published by the Government. These publications included a "position paper update" on the public document published by the Government in November 2017 entitled "Corporate Tax and the Digital Economy", an important framework document outlining a series of ambitious Government proposals for taxing the United Kingdom's rapidly growing digital economy.

Corporation Tax and the Digital Economy

The November 2017 document, "Corporate Tax and the Digital Economy", addressed ambitiously the question of the extent to which international tax rules (and the United Kingdom's tax legislation) were effectively taxing the profits of digital businesses in countries where such businesses create value.

In particular, the position paper focused on several challenges:

  • that the United States' current programme of tax reform and the continued implementation of the OECD's base erosion and profit shifting report are unlikely, by themselves, to resolve the taxation challenges posed by the digital economy. Opportunities for cross-border tax avoidance in the digital economy are most likely to be addressed by further fundamental reform of international tax rules;
  • the importance of user-generated value to digital businesses, and the lack of current recognition or capture of that value in the existing international tax framework; and
  • the identification of the participation of "users" of the digital economy as a key feature of value creation in certain digital businesses. Once the importance of user-created value is ascertained, the challenge would then move to the practicalities of income being subject to taxation where that income derives from online advertising or intermediation activity, split between jurisdictions in accordance with a user- or market-based metric.

The Government's position paper on the digital economy was published against a backdrop of other reports into the same sector by international policy-makers, including the European Commission and the OECD Task Force on the Digital Economy (due to present a report later this month at the G20 meeting in Argentina). Unilateral action has already been taken by a number of jurisdictions such as India, and is being considered actively by other jurisdictions, including The Netherlands and New Zealand, which have proposed taxation measures focused on, or particularly applicable to, digital businesses.

The Spring Statement Updated Position Paper

The Government's updated position paper on "Corporate Tax and the Digital Economy", published on 13 March 2018, provides additional details on possible international and United Kingdom tax changes which would address risks which have been identified relating to the taxation of the digital economy. While the Government is careful to state that the updated position paper does not articulate the Government's final position, a number of themes in the Government's approach can clearly be discerned.

  • The updated position paper provides a greater explanation regarding the Government's understanding of "user-participation" and how user engagement and active contribution enhances the value of certain digital businesses. In the paper, the spotlight of the Government is placed on a variety of circumstances contributing to business value, including the depth of user engagement with digital platforms, correlation of user activity across online platforms, the inter-relationship of user contribution and brand development, and the differences between participating users of digital businesses and traditional customers.

    Social networks, e-retailers, intermediation platforms and search engines are compared in the paper in the context of user-participation, with the aim to ensure any tax measure is targeted at businesses for whom user-participation represents a significant contribution to value creation.

  • One of the long-term aspirations of the Government in the updated position paper is to facilitate a reform of the international tax rules relating to the digital economy in double taxation treaties. Ultimately, the ideal situation for the Government would appear to be to tax value-creating activities of digital businesses based on user location. Currently, the provisions of Articles 5, 7 and 9 of the OECD Model Tax Convention (the framework for the United Kingdom's tax treaties) do not allow this, being focused on business (permanent) establishments, as opposed to imposing taxation based on value which is created and driven by user-participation.

    Changing current international taxation approaches is likely to prove very difficult and time-consuming, as the Government admits in its updated position paper. Even before the mechanics of taxation on user-participation can be considered, additional work would be required on value creation by user-participation. Where, geographically, is value from user-participation in a digital business actually created? How should user-created value be measured? Once measured and evaluated, how should user-created value be allocated across different jurisdictions? How would double taxation be avoided once such user-participation value is assessed to tax?

    Any practical measures to tax the digital economy and user-participation will need to overcome these challenges. At the heart of the Government's proposals to tax user-participation is the need to recognise user-participation as a value-driver for certain digital businesses, and develop a methodology for profit attribution relating to user-participation. The Government has proposed that any change of international tax law to refocus on user-participation in digital businesses should then be possible through amendments to the OECD Model Tax Convention. While these challenges may not be insurmountable where a broad consensus is achieved across many governments and policy-makers, as the OECD's remarkable BEPS project has shown, it remains the case that such challenges are unlikely to be overcome quickly.

  • Accordingly, and perhaps unsurprisingly, the Government has suggested an interim approach involving short-term indirect taxation measures to increase the amount of United Kingdom tax paid by businesses deriving value from user-participation. Such a tax would apply to a digital business irrespective of the geographical location of the business and regardless of any physical presence or taxable permanent establishment in the United Kingdom. The update to the position paper sets out a framework for consideration of such an interim taxation regime.

    The methodology for creating an interim tax on digital value created through user-participation looks similar to the United Kingdom's diverted profits tax (introduced, controversially, in 2015). The Government's proposal would be to determine the scope of the tax, defining the channels through which users create value through their participation and impose taxation on revenue streams of businesses for which those channels are most important. Taxation might be applied in different ways to particular business models and revenue streams. The example of online advertising is given in the updated position paper, with the Government suggesting that a right to taxation may arise from online advertising targeted at United Kingdom users of an in-scope online platform.

    The difficulties in effectively framing the scope for taxation in such a malleable and rapidly developing marketplace are likely to be substantial. Opportunities for double taxation, non-taxation or discriminatory taxation between businesses will exist, and the Government states that it does not underestimate the technical challenges. Somewhat optimistically, the updated position paper cites similar hurdles having been overcome in VAT legislation. However, the comparison between what the Government is considering in the context of taxing the digital economy on the one hand, and VAT legislation on the other, is slightly misleading. The comparison does not expressly recognise the time taken to refine and streamline VAT legislation over an extended period, nor the multi-national intra-EU nature of VAT generally.

    The concern is likely to remain, pending the finalisation of the Government's proposals, that the expedience of revenue raising through a unilateral "short-term" measure is likely to develop its own impetus in favour of a quick legislative fix, regardless of the technical challenges which may exist.

Conclusion

The Government clearly states in the updated position paper that its final position has not yet been determined, noting that both the EU Commission and the OECD are due to shortly present updated versions of their own reports and workstreams in the area of the digital economy. Further comments are invited by the Government from stakeholders, and no doubt the Government will have a careful eye open during the remaining months of 2018 towards any unilateral developments in respect of digital economy taxation among its trading partners, and in particular the United States.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions