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UK: Considering tax implications of digitalisation of economy

UK: Tax implications of digitalisation of economy

As technology and automation bring new levels of choice, customers have the power to shape and define the business strategies of their suppliers.

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Given this business model challenge, it also poses significant questions for tax. The changing nature of the customer is sharpening the focus on the correct mechanism for taxing value. This means further revisions to international tax principles—including digital taxation, increasing risk of permanent establishment challenge, and a shift in where taxable profits are expected to accrue under transfer pricing rules.

With the OECD’s base erosion and profit shifting (BEPS) initiative, there has already been increased scrutiny by tax authorities on taxing businesses according to where key decisions are made and value is created—rather than where legal ownership of assets resides or the contractual allocation of risk.

In this age of the customer, there is a potential shift from a tax perspective in the relative value contributions of certain business functions (such as R&D, supply chain and marketing). Tax authorities are already beginning to ask more detailed questions about how and where value is created in customer-centric organisations. In particular, there has been an increase in challenges around local marketing intangibles; the role of in-market teams in developing, not just executing, commercial strategy; and arguments that position customer relationships as more valuable than other intangible assets, such as technology or brand. As companies look to take costs out of the business and push decision making further down the organisation, this is also placing greater pressure on more traditional distribution models which have been characterised as limited risk for transfer pricing purposes.

While many businesses are still grappling with the demands of BEPS, the tax agenda continues to develop with the digital taxation proposals being discussed at the OECD, as well as at the European Commission and unilaterally.

Since the publication of the OECD consultation paper in January 2019, concerns have been raised about how far the proposals go and how they would likely affect all taxpayers, not least given the evolution of business models and blurring of traditional sector lines.

  • The current “user participation” proposal indicates that the existing tax framework ignores the value that certain business models derive from user participation. 
  • The “marketing intangibles” proposal is even broader in scope, potentially attributing value to marketing intangibles regardless of legal ownership or “DEMPE” analysis of the functions relating to those intangibles.

All of this means that businesses must be able to evidence and defend where and how value is created in their organisations—in particular, the value derived from winning with customers in a customer-centric business.


Read a June 2019 report prepared by the KPMG member firm in the UK

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