Public Accounts Committee welcomes impact of Digital Services Tax but expresses concerns over future revenues

That was the headline to emerge from the committee’s a report into the DST, which was introduced in 2020.

The DST has raised £358 million in its first year, 30 per cent more than expected, much of which has been attributed to the impact of COVID-19 in driving online sales. However, the committee has expressed concern over whether future revenues will meet or exceed the £3 billion projected to be raised by 2024-25.

Sarah Olney (Lib Dem), who acted as the committee’s lead on the inquiry, said the committee has been ‘very pleased’ to see HMRC tackle the taxation of multinational corporations, after nearly a decade of calls from  PAC to address multinationals avoiding corporation tax.

However, she continued: ‘the Revenue needs to up its game on compliance - especially across jurisdictions - about how the tax will actually operate, over what will likely be years more before a proper international tax is fully operational.’

PAC is also concerned that any further delays to the Organisation for Economic Co-operation and Development (OECD) plan to reform the taxation of multinationals could prompt large multinational business within the scope of the levy to consider using their resources to “circumvent the tax”.

The government is required by law to review the operation of the DST in 2025 in the event of further delays to the OECD reforms beyond 2024.

Therefore, the committee makes five recommendations in the report to HM Treasury and HMRC aimed at strengthening the operation of the tax. They are:

1. HMRC should report to the Committee the final revenues for 2020–21 once it has completed its assessments to identify all the revenues for the baseline year of 2020–21, and then report annually on the difference between the tax owed in theory and the amounts actually paid for this and future years (the tax gap).
2. HM Treasury and HMRC should consider what lessons can be learned from the Digital Services Tax’s introduction in terms of implementing tax systems efficiently and assessing the proportionality of its impact on taxpayers.
3. HMRC should update Parliament, within three months of international agreement on implementation of Pillar One, on progress with the implementation of the reforms.
4. HM Treasury and HMRC should set out to the committee their objectives for the OECD reforms, ensure parliament is able to effectively monitor the operation of these changes and set out ‘robust’ revenue forecasts once the details of the new regime are known.
5. HMRC should develop a contingency plan in the event the DST needs to be extended beyond 2025, including how it plans to address non-compliance.

The PAC report warns that uncertainty around the final make-up of the OECD’s plan (and in particular, how profits will be transferred between countries) makes it hard to compare the receipts generated by the DST and those likely to be generated by Pillar one.

The report suggests that according to the Office of Budget Responsibility (OBR), Pillar two will generate revenues of more than £2 billion pounds per year by 2027–28. The Chartered Institute of Taxation (CIOT) has expressed doubt that this level of receipts will be achievable, although HM Treasury has stated that the estimate is not contradictory to OECD projections.

Additionally, the Committee argues that implementing the multinational Pillar one reforms to the planned timetable looks challenging, and it is crucial to “get key players on board”. The United States of America, which is home to the majority of companies likely to be affected by this policy, has already indicated its opposition and has “threatened sanctions” against counties that adopt them.

The report also talks about the DST being an “interim solution”. They cite the CIOT’s written evidence which described the scheme as a “blunt instrument” that is unable to accurately represent the tax on the profits related to user based value on all business on which it is imposed.

The CIOT issued a press release following publication of the report. CIOT Tax Policy Director John Cullinane said “HM Treasury and HMRC should consider what lessons can be learned from the Digital Services Tax’s introduction in terms of implementing tax systems efficiently and assessing the proportionality of its impact on taxpayers”.

He added: “this report only emphasises why reaching a multilateral solution to taxing digital multinational companies is so important, and why it is important that all governments, including our own, redouble their efforts in this area, enabling us to repeal the Digital Services Tax once an appropriate global solution is in place.”

 The full report can be found here.