Internet companies, as with any multinational with operations in the UK, are liable to tax on that part of its profit that arises from value created in the UK. Indeed, this ‘source-based’ approach is the principle underlying all corporate tax regimes across the OECD. As the Institute for Fiscal Studies has noted, the current tax rules are not designed to tax either revenue or sales generated in the UK.[1]  The fact that an internet company’s sales to UK customers can be quite so high, and the company pay relatively little in UK corporation tax, is something that has often been raised – for example, by the Public Accounts Committee in the case of Amazon in December 2012. Of course, that companies in this position will be paying VAT to the Exchequer on the sales they made to UK consumers, though usually the debate as to the amount of tax these companies pay has focused on the tax they pay on their profits.

There has been discussion of the possibilities of fundamentally reforming the taxation of companies so that the location of a company’s operations no longer matters – ‘destination-based cash flow taxation’ as it is known. The difficulty, as commentators note, that it would represent a radical departure in the international tax rules – and create some clear national winners and losers, so that to date the prospects of this type of reform seem slight.[2]

It is worth adding that there are widespread concerns about the ability of all multinationals, internet companies included, to “profit shift” – that is, to manipulate their real or reported activities so they can declare a greater share of their worldwide profits in low-tax jurisdictions, eroding the tax base in high-tax jurisdictions. It was in response to this that the Government took unilateral action to introduce the Diverted Profits Tax, often called the ‘Google tax’, in April 2015. The then Treasury Minister, David Gauke, gave a short summary description of how this additional levy works in practice in a speech in June 2015 about the Government’s business taxation plans:

We introduced the DPT to protect ourselves against highly contrived arrangements to avoid UK tax. Its objective is to ensure profits are taxed in the UK when the economic activities that give rise to them take place here. A few points about DPT. It targets contrived arrangements… …The type of arrangements where a multinational company goes to extraordinary lengths to avoid paying tax in the UK. …Those arrangements have to be between related parties – that is, companies within a group; …They must create a tax mismatch whereby a group pays less than 80% of the tax that would have been due in the UK without these arrangements; …It won’t apply to SMEs … And the tax benefits created must outweigh any other commercial purpose.  The ultimate charge levied under the DPT will normally be calculated by the application of the transfer pricing principles, and adjusted to take account of taxes paid in other jurisdictions. This ensures that there is no double taxation. The DPT is not an attempt to tax profits that have been taxed elsewhere. This is a tax designed to ensure fairness – not to make ourselves uncompetitive. It is based on the principle that if you generate profits from UK activity then you are expected to pay your fair share. And it sends a powerful signal: we take these matters seriously.[3]

At the time of the Autumn 2017 Budget the Government published a position paper on taxing the digital economy. While the paper sets out a long term objective for improving the international tax system, specifically in relation to transfer pricing, it makes the case for unilateral action in the short term, in the form of a UK withholding tax on royalties paid, in connection with sales to UK customers, to no or low-tax jurisdictions.[4] Responses to the position paper were invited by 31 January. On 13 March the Government published an updated paper, which set out its current position as follows:

The government has since benefitted from substantive feedback from a wide range of stakeholders, who have offered constructive challenge and insight into this issue. It is therefore publishing an updated position paper to reflect on some of the key questions that came out of that process, and provide an update on the government’s thinking.

The updated paper sets out the government’s view that:

  • the participation and engagement of users is an important aspect of value creation for certain digital business models, and is likely to be reflected through several channels, such as the provision of content or as a contribution to certain intangibles such as brand.
  • the preferred and most sustainable solution to this challenge is reform of the international corporate tax framework to reflect the value of user participation. It is important that the members of the OECD’s Inclusive Framework make progress in developing multilateral solutions, and to assist this process the paper sets out some of the government’s initial considerations on what this could include.
  • as set out at Autumn Budget, in the absence of such reform, there is a need to consider interim measures such as revenue-based taxes. The paper explores some of the important considerations regarding the scope and design of an interim measure, and the steps that could be taken to ensure that it is well-targeted and protects start-ups and growth companies. The government still thinks there are benefits to implementing an interim measure on a multilateral basis and it intends to work closely with the EU and international partners on this issue.

This paper does not look to set out the government’s final position on these issues. It instead sets out the government’s updated thinking, with a view to engaging further with businesses and other stakeholders to better understand and resolve some of the outstanding questions. The government is nonetheless clear that there is a challenge that needs to be solved. The current misalignment between where digital businesses are taxed and where they create value threatens to undermine the fairness, sustainability and public acceptability of the corporate tax system.

The government hopes to find a multilateral solution to this challenge, and believes that the upcoming OECD report and G20 summit in Argentina will be important in setting out a programme of work for achieving that. The government thinks that this paper can help to inform that work, and help to achieve a coherent, proportionate and sustainable long-term solution.[5]

The wider questions of corporate tax avoidance are considered at length in a Commons Briefing paper Corporate tax reform (2010-16), CBP5945, 25 July 2016.

Further reading :

John Vella, Taxing digital business: a plea for holistic thinking, Oxford Centre for Business Taxation blog, February 2018

Sanjeev Gupta, Michael Keen, Alpa Shah, and Genevieve Verdier (eds), Digital revolutions in public finance, November 2017

Helen Miller, What’s been happening to corporation tax?, IFS Briefing Note BN206, May 2017

Helen Miller & Thomas Pope, ‘Corporate tax avoidance: tackling Base Erosion and Profit Shifting’ , in C. Emmerson, P. Johnson and R. Joyce (eds), The IFS Green Budget, February 2016


[1]    “What does the row over Google’s tax bill tell us about the corporate tax system?”, Institute for Fiscal Stuides, 9 January 2016

[2]    For example, “Strong arguments to retain corporation tax over a sales tax”, Chartered Institute of Taxation, 19 January 2017

[3]    HM Treasury press notice, 1 June 2015

[4]    Details are collated on see also, Chartered Institute of Taxation press notice, Digital economy – new paper a useful contribution to reform debate, 22 November 2017

[5]    HM Treasury, Corporate tax and the digital economy: position paper update, March 2018 pp2-3

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