Chartered Institute of Taxation
CIOT
Our mission is the advancement of public education in taxation.
ID: 91596579174-61
Lobbying Activity
Response to Fair taxation of the digital economy
16 May 2018
The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities.
The CIOT is pleased to respond to the Recommendation relating to the corporate taxation of a significant digital presence (C(2018)1650 final) and the Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence ((COM(2018) 147 final) published by the Commission on 21 March 2018. Please refer to our full response, which is attached.
The CIOT has engaged with the debate around whether the international tax system deals satisfactorily with the modern global economy since the digital economy was identified as an action point of the G20/OECD BEPS project in 2013, responding to the EU Commission, as well as the OECD and the UK government on the topic. We are also responding today to the EU Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services.
We welcome the thoughts presented in the Commission’s recommendation for taxation of a significant digital presence (a ‘digital PE’). These proposals sit alongside the issues outlined in the OECD Interim Report, which it is anticipated must be addressed in the coming year or so to arrive at a multilateral long-term solution, as well as the work by the UK government, as set out in its Updated position paper published on 13 March 2018. These papers all focus on how the new sources of value, such as user participation, can be measured so that profits can be attributed in respect of it. However, this work is only serving to emphasise the complexities that arise in seeking to determine and measure any such value, how to attribute profit and then how to tax it. We support all efforts to reach international consensus and a multilateral long-term solution.
The proposal of a significant digital presence threshold to result in a digital PE is a move away from the identification of permanent establishments based on physical presence. In addition current profit attribution rules rely on significant people functions (SPFs) within a country. It is unlikely that there could be material SPFs within a county without there also being a permanent establishment under current rules. Therefore, even if a significant digital presence is identified, current profit attribution rules are unlikely to result in more than a small profit allocation to it. Therefore, it is necessary to consider both the rules relating to identification of PEs and profit attribution guidelines at the same time.
It is not agreed by all businesses that users do contribute significant value; but if it is accepted that users do contribute value, the amount of value that they do contribute will inevitably vary from business to business. In our view, the overwhelming bulk of value creation will generally be represented by the long-term investment in the platforms themselves, and this is where the vast majority of profit and taxing rights should be allocated; the attribution of profit to user participation will be small, and once divided between all jurisdictions where users participate, it will not represent a major source of income for governments in those territories.
We would prefer to see a long-term solution which aligns with the OECD Ottawa principles of neutrality, efficiency, certainty and simplicity, effectiveness and fairness and flexibility and sustainability. The proposals to tackle the digitalised economy outlined by the EU Commission’s proposal for a significant digital presence fall short of a number of these principles for the reasons outlined in our attached response.
Read full responseResponse to Fair taxation of the digital economy
16 May 2018
The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it; taxpayers, their advisers and the authorities.
The CIOT is pleased to comment on the proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services published by the Commission on 21 March 2018. Please refer to our full response, which is attached.
The CIOT has been involved in the debate around whether the international tax system deals satisfactorily with the modern global economy since the digital economy was identified as an action point of the G20/OECD BEPS project in 2013. Since then we have engaged with the EU Commission, as well as the OECD and the UK government on the topic. In particular, we are also responding today to the EU Commission’s Recommendation relating to the corporate taxation of a significant digital presence, also published on 21 March 2018.
In our view, objectives for the tax system should include rules which translate policy intentions into law accurately and effectively, without unintended consequences. We understand that governments feel under intense political pressure to take action to raise more tax from “the digital economy”. However, we are of the view that the proposed digital services tax is too broad a measure and the proposed rate of 3% is too high.
We remain of the view that the existing principles of the international tax framework and, in particular, the principle that a multinational group’s profits should be taxed in the countries in which it undertakes its value-generating activities are the best way to tax global profits. However, the increasing and pervasive nature of digitalisation across businesses and, therefore, the economy presents unique and new challenges for tax policy makers in seeking to address the perceived imbalances that arise. In particular, it is not clear that the current international tax framework is able to take account of the differences in how certain digital business models operate and generate value.
The CIOT has consistently advocated that a long term, sustainable solution will only come from a multilateral approach, across the globe. Such an approach is the best way to avoid the problems that would inevitably arise from unilateral actions: double taxation and significant compliance burdens for businesses, which would stifle economic growth and innovation. There is also a negative impact on the competitiveness of countries (or group of countries) introducing unilateral measures. In addition, perversely, differences between tax systems, which would result from unilateral action, are likely to give rise to arbitrage/tax planning opportunities.
We welcome the OECD’s Interim Report 2018 on Tax Challenges arising from Digitalisation published on 16 March 2018 which outlines the work that has been undertaken in working towards a multilateral solution and concludes that there is no consensus on the need for, or merits of, interim measures. In our view, while this work continues, interim measures are not necessary and are, instead, counter-productive to the multilateral discussions and negotiations. We would prefer to see the EU refrain from taking interim measure at this time, particularly given the relatively short time period in which the OECD has committed to reaching a global, long-term solution.
The lack of international consensus around interim measures also means that there is little likelihood of groups getting credit relief for a digital services tax anywhere in the world, resulting in double taxation. In this regard, we also note the discussion of the design of any interim measures in the OECD Interim Report 2018.
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