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Further discussions on the EU’s plans to tax the Digital Economy

Further discussions on the EU’s plans to tax the...

This month has seen further discussions on taxation of the Digital Economy measures, but the UK has remained quiet.

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matthew-herrington

Partner, International Tax

KPMG in the UK

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On 7 and 8 September, at an informal meeting of the Economic and Financial Affairs Council (ECOFIN), taxation of the Digital Economy was once again on the agenda for discussion. According to the press release, the outcome of the discussion was broad agreement that the EU should progress with plans to implement an interim Digital Services Tax (DST), based on the European Commission (EC) proposals published in March 2018, by the end of this year. A ‘sunset clause’, reportedly proposed by France and Germany, aiming to ensure that the DST would be a temporary measure only, until such time as international consensus on a long-term solution is reached, was also agreed during the meeting.

Although the UK was represented during the discussion, no explicit comment has been made by the UK Government on the proposals (and further, the Austrian Finance Minister is quoted as referring to the ‘EU27’ in his statement following the meeting). Since the meeting, there has been a steady flow of communications on the matter – including a draft report from the Economic and Monetary Affairs (ECON) committee, published on 25 September, and a report issued by Copenhagen Economics, both considering the EU’s DST proposal – indicating that this topic remains high on the international agenda. With no commentary to suggest otherwise, it is understood that the UKs position in relation to the proposals has not changed since HM Treasury’s publication of an updated taxation of the Digital Economy position paper in March this year. However, we understand that the topic remains on HM Treasury’s agenda and we may therefore see developments in the coming months.

Any UK developments would of course need to be considered through a Brexit lens. Firstly, the interaction between the DST and the Brexit negotiations is as yet unknown. If agreement on the DST is reached by the end of the year, the implementation takes place within the original timeframe and the UK ‘transition period’ on leaving the EU does go ahead, then it is possible that the UK would - in theory - also be required to implement the DST as of 1 January 2020 (and indeed, the UK Government may conclude that this is the most appropriate approach to addressing the digital tax question).

The alternative would be for the UK to ‘go it alone’ with unilateral action. Recent press coverage has proposed a potential online sales tax to level the playing field between traditional and online retailers – with some calling for the revenues from an online tax to be used to reduce business rates. However, the Chancellor in June this year made it clear that unilateral action was not currently on the agenda for the UK. In our view the issue of a UK digital tax is a complex one, with many points requiring further, more detailed exploration: How should a digital tax be levied? How can it be appropriately targeted? Is it right to link it to other charges (such as business rates)? How would such a unilateral measure interact with EU (and wider) measures?

On the other side of the Atlantic, the US has also been proactively engaging in taxation of the Digital Economy debate – notably with an increasing focus on marketing intangibles as a means of allocating more profits to a market jurisdiction and a willingness to revisit the physical presence test. The latter could be seen in the light of the Wayfair decision earlier this year, although it should be noted that the Wayfair decision fundamentally concerns destination-based sales taxes, which have not traditionally required a nexus.

However, the US does remain opposed to any changes to profit allocation or nexus rules that target digital companies. Instead it remains committed to the arm’s length standard (opposed to any formulary approach), believing it to be sufficiently flexible to address the challenges raised by digitalisation.

For further information please contact:

Matthew Herrington
 

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