This is a report on the House of Commons Westminster Hall debate on digital taxation held on 27 March 2018. The discussion focused on proposals for an online turnover tax for big tech firms, but also saw discussion of the Making Tax Digital (MTD) programme. Conservative Neil O’Brien asked for the debate.
Taxing tech giants
It is significant that both the European Commission and the Treasury have independently arrived at some similar conclusions on digital multinational corporations (MNCs), said Neil O’Brien, but he accepted that taxing large digital businesses and ‘distinguishing them from other firms that trade internationally is not simple or straightforward’. A simple division of Google’s global profits by its share of users in the UK would not be a fair basis to work out its tax liability here, because a large proportion of its engineers and R&D are in the USA. But he added that it feels like we might expect a bit more of the value created by UK users to be reflected in taxable value in the UK.
A revealing map in the Commission’s impact assessment shows very little correlation between where digital businesses’ user activity is and where in Europe their profits are booked, said O’Brien. In other words, there is no real link between where value is being created and where tax is being paid. He wants action taken on three principles: any new tax has to be for the largest international businesses only; the tax must have a clear distinction between tech businesses and other international firms; and small businesses must reap the benefits from any new tax on large digital firms. He accepts that a new tax on large tech firms is unlikely to raise more than a few hundreds of millions of pounds but will ‘help level the playing field a bit and allow the Government to do more to cut tax on small businesses. At present, the accounting profits are simply too easy to move to a low-tax jurisdiction. A sales tax is not a good proxy for value being added but user-created value is much better, he said. He is in favour of a turnover tax ‘in the meantime’ (before a multilateral solution can be found), however.
Interestingly, O’Brien said the Commission’s impact assessment said that reducing the threshold for inclusion from €750 million to €500 million would double the number of firms affected and caught up by such a tax, but only raise revenues received by seven per cent.
A number of other Conservatives weighed in to the debate. In an intervention Nick Boles (Con) said the Government should think about the property taxes HMRC has historically raised from business, and our likely need to replace business rates as a source of revenue.
Independent high street shops, trading from brick-and-mortar premises, are now competing against large online companies that do not pay the same business rates in particular, and these large companies can absorb the costs of bureaucracy and overheads much more because they have a larger presence but without the physical footprint, argued Robert Courts (Con). Whether a new tax or an amendment to the existing tax system should be reserved for the largest international online businesses: “The additional revenue from any tax on big online retailers could enable us to help small businesses further with their corporation tax or to provide for further relief or exemptions for small firms, particularly those on the high street.”
Lee Rowley (Con) said we must have a taxation system that is fair, notwithstanding the huge benefits that have been brought to society by the internet over the past 15 or 20 years. “I accept the principle that taxation should be based on value creation as a whole, but how we define that and whether we create a system that is incredibly complicated in order to be able to tax it is something on which the debate and discussion has a long way to go . We have to get away from some of the tendencies over the past five years or so on corporate tax to shout loudly as a collective political class about corporate tax, rather than doing some of the hard spade work.” There are monopolistic companies at the top of these industries, and we have to think in the longer term about how we address that. If we do not do so, we will lose the confidence of people that we can regulate effectively, he added.
Ranil Jayawardena (Con) stressed the importance of multilateral action. “We must ensure we are internationally competitive. Just as we have reduced corporation tax so that we are leading the world, we must ensure we do the same in other taxation”, he said. Reform should be of the international corporate tax framework, with OECD and G20 co-operation: “There is no point in our doing one thing if other countries do not follow, and no point in our doing one thing if we cost jobs in this country and put businesses out of business.”
Chris Philp (Con) said that a number of typically large multinational companies, often providing digital services, have succeeded in organising their affairs, while fully in conformity with current international tax laws, in such a way that they manage to argue that the substance of their economic activity takes place in very low-tax jurisdictions. This means some of the companies concerned will use their influence to try to slow things down and stymie progress. While it is certainly right to take a multilateral approach to changing the way we define economic activity, it is important to have a plan B that could be implemented much more quickly, he said. “I do not think that, if we took unilateral action, Google or Facebook would suddenly refuse to do business in the UK. If they did, they would be pulling out of their second largest global market.” The proceeds of such a tax could usefully be applied in the area of business rates, he added.
According to HMRC, multinationals avoided as much as £5.8 billion last year in corporation tax alone, a 50 per cent increase from the Government’s previous forecast, claimed the Shadow Chief Secretary to the Treasury Peter Dowd. There is a consensus across the Chamber about large multinational technological companies not paying their fair share of tax, and increasingly shifting profits offshore to tax havens and countries with low-tax regimes, he said. The Government’s two consultations on corporation tax and the digital economy, and royalties on withholding tax, were important steps, but they remain pretty poor compensation when considering the deficit of meaningful action that is being taken, Dowd argued.
The Labour spokesperson noted that: “The Chartered Institute of Taxation has rightly pointed out that any action must be in co-operation with other states, as far as possible, to prevent the UK becoming an outlier. It argues that unilaterally abandoning a negotiated international approach to allocating taxable profits between countries would risk retaliation, double taxation and perversely new arbitrage opportunities.” Chris Philp intervened on Dowd to say that while profit allocation does need to be done multilaterally on a global basis, a ‘sales tax or certainly a user tax’ could be done unilaterally. To which Dowd replied that the debate is to be had.
For the SNP, Treasury Committee member Stewart Hosie spoke in the debate. On a turnover tax, he said: “Although there might be some superficial merit in that, it could potentially be damaging for high-volume, low-margin businesses. It would also, I suspect, immediately increase the risk viewed by those who provide capital for large digital start-ups—perhaps those with a large turnover and a business plan that will not see profit for some time. One can see how the funders of capital for such start-ups might be tempted to put their money into similar businesses located elsewhere.”
A new Pigouvian tax?
Kemi Badenoch (Con) argued for a levy on large digital companies to provide additional funding for the police. She said that her local police force had told her that dealing with cyber-crime is their number one priority, and a lot of police time is being redirected to that area, at the expense of other areas. Such a levy would be Pigouvian, she said, because the sites run by these companies were providing platforms for user-generated content that constituted a significant part of the increase in cyber-crime, namely ‘the creation, sharing and distribution of indecent images, especially of children; harassment on social media; cyber-bullying and other activities designed to cause distress and anxiety; and, of course, online activities related to terrorism, hate crime and all sorts of incitement’. “I do not like to propose new taxes, but the cost of [policing] these activities is being borne by citizens and businesses across the country, and it is those who make the most money from them who should be paying,” Badenoch argued.
The minister did not respond to Badenoch’s proposal in his winding-up speech, but the progenitor of the debate, Neil O’Brien, praised the proposal, observing: “People in business improvement districts pay for extra policing. It is right that some people pay for the costs created by the growth of the online economy.”
Making Tax Digital
Turning to Making Tax Digital (MTD), Damien Moore (Con) said the current annual system of tax returns is an administrative burden and an overly lengthy process for businesses. “The old system was far too complex, and businesses would often only know their tax liabilities at the end of a financial year. I believe that businesses with a turnover of below the £85,000 VAT threshold can also be great beneficiaries of digital taxation.” There will inevitably be some kinks in the system, he said, but this is a ‘progressive’ move that will encourage greater engagement with HMRC, save both the Government and the taxpayer money and ensure that businesses, whatever their size, are not shackled by bureaucracy and burdened by paperwork.
On MTD, Peter Dowd said the mandated start time for small businesses to file online for returns will coincide closely with Brexit, so there is a serious risk that they will be overwhelmed with the nature and scale of changes required during that period, especially in relation to digitalising tax returns.
The SNP welcomed that only businesses with a turnover above the VAT threshold would have to keep digital records, and only for VAT purposes by 2019. Stewart Hosie said MTD challenges remain, such as businesses no longer being able to rely solely on manual records, and changes to VAT returns, which must be submitted through the functional compatible software and not the normal HMRC portal, all at the same time as Brexit: “We all know that in a period of flux when there are changes to systems, there is more opportunity for fraud.” The SNP is concerned about the effect that digital reporting could have on small businesses with limited connectivity or in rural areas. The closure of HMRC offices could limit their ability to help businesses and individuals, he said. If the digital tax roll-out works, the Minister must not allow that to drive the policy and drive down the VAT threshold, said Hosie.
In his speech at the end of the debate Financial Secretary to the Treasury Mel Stride did not respond to the points on MTD. He said that, whatever MPs may feel about tech companies or internet-based businesses, the accusation was not in any way that they are avoiding taxation, but simply that the current international tax regime does not effectively accommodate the way they generate value within the UK. “We know that for certain types of digital platform — typically, the search engines, the online marketplaces and the social media providers—a lot of the value is generated via the interaction between the end user and the platform itself. Therein rests the actual value. The question we then have to ask is how do we effectively address that situation and ensure that where businesses generate huge sums of profit within the United Kingdom, a fair share of corporation tax falls due to them,” said the minister.
Stride argued that taxing the royalties that flow to intellectual property held in zero and low-tax jurisdictions shows the Government on the ‘front-foot’. The Government wants a multilateral solution but, the minister warned, ’if we do not move forward at sufficient pace to put the appropriate measures in place, we will seriously consider an interim position — a unilateral move’, along the lines suggested by Philp. “Under those circumstances, we would potentially look at a tax based on revenue, recognising that we do not want to capture market entrants or early-stage companies that may have some level of revenues and therefore fall to this type of tax, but which could be unprofitable at that stage of their development. This is where the whole issue of de minimis and thresholds comes in,” he said. The minister concluded by telling Neil O’Brien he had “my personal assurance that we will continue to take this matter extremely seriously. We will press ahead with vigour on the basis that, ultimately, it is only fair to do so.”
The full hour and a half debate can be read here.