The two recent UK HM treasury initiatives of publishing a Position paper on Corporate Tax and Digital Economy, dated Nov 22nd,2017 and the later Consultation document on Royalties Withholding Tax published December 1st, 2017 are aiming to organize a set of tools primarily addressed to increase the tax collection of “businesses primarily in the digital sector” and make sure tax does not contribute to generate competitive distortions in the local market.
Summarizing both papers affecting Digital Economy Taxation:
• The Cornerstone position is giving countries right to tax profits that derive value from MAUB (Material and Active User Base), even in the absence of physical presence.
• OECD needs to put forward solutions that build up on the EU space discussions.
• Suggest targeting the big reform at specific business models level.
• Immediate action: against MN Groups, primarily in Digital Sector, that allocate IP income to low/no tax countries where they have limited substance.
• Interim options:
o A new Tax on UK market digital revenues.
o Extension of UK withholding tax to cover royalties paid in connection with sales to UK customers to no or low-tax jurisdictions.
The consultation paper suggests this WT could apply even when the royalty payer has no UK taxable presence, and the text considers a “reference to payments for the right to distribute specified goods or provide specified services in the UK”. The aim seems to have been moved to capture broader than digital sector cases of IP placed at a low tax country related entity at second or third level above the UK in the MNE legal org chart.
The potential integrated effect of all these measures is certainly far, far reaching, requiring a thorough analysis in connection with what is happening at the EU, US and OECD level from this angle.