Success of UK’s Digital Services Tax tempered by concern about future avoidance or evasion by big tech - PAC report
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As long ago as 2012, the Public Accounts Committee called on HMRC
to address multinationals avoiding UK corporation tax by moving
money to other tax jurisdictions. In a welcome move, the Digital
Services Tax was finally introduced in 2020 to capture the value
added to major digital businesses by UK users interacting with
online marketplaces, social media platforms and search engines. It
is a tax on turnover, not profits, for business groups whose
revenues from in-scope...Request free
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As long ago as 2012, the Public Accounts Committee called on HMRC to address multinationals avoiding UK corporation tax by moving money to other tax jurisdictions. In a welcome move, the Digital Services Tax was finally introduced in 2020 to capture the value added to major digital businesses by UK users interacting with online marketplaces, social media platforms and search engines. It is a tax on turnover, not profits, for business groups whose revenues from in-scope activities are more than £500 million and where more than £25 million is derived from UK users. Designed as an interim measure while the OECD implements a more complex and complete international tax agreement, the DST operates relatively crudely but still raised £358 million in its first year - 30% more than expected. But there is continuing uncertainty about how much tax should have been paid in its first year due to the tax’s novelty and the effects of the pandemic. It remains unclear whether future revenues will meet or exceed the projected £3 billion by 2024-25. The Treasury acknowledges the DST is a ‘second best’ solution while it awaits the OECD reaching complete agreement across around 140 tax jurisdictions. The PAC is concerned that likely resulting delays to implementation may prompt the large multinational businesses in scope of the tax to consider using the huge resources and expertise at their disposal to circumvent it. HMRC will need to be ready with robust measures to ensure compliance, possibly for the long-term. Sarah Olney MP, PAC lead on this inquiry, said: “We were very pleased to see HMRC finally getting to grips with the realities of taxing multinational corporations, after years of PAC recommendations on this. But 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 report (attached) conclusions and recommendations 5 HMRC has collected more Digital Services Tax than expected in its first year. Revenues of £358 million in 2020-21 were 30% higher than projected by the OBR. Different businesses paid both more and less than expected, with positive and negative impacts from the COVID-19 pandemic creating significant variation against expectations. Fourteen businesses paid more than expected, while fifteen paid less than expected or nothing. However, HMRC is still identifying additional potential payers so there is continuing uncertainty about how much tax should have been paid in the first year. It is therefore difficult to know what a ‘normal’ year’s revenues would look like, and how accurate is the current expectation of around £3 billion of revenues by 2025. Recommendation 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 thereafter report annually on the difference between the tax owed in theory and the amounts actually paid for this and future years (the tax gap).
6 HMRC implemented the Digital Services Tax with little cost, and the experience could provide valuable lessons for other new taxes. HMRC implemented the tax on schedule for only £6.3 million, less than budgeted, though there will be ongoing compliance costs. The small population of payers (18 in 2020-21) means that HMRC has been able to build a relationship with each taxpaying business. It is also learning more about the population of digital businesses generally. HM Treasury says that the tax is delivering fairer outcomes, but some companies face potential double-taxation for the same transactions - first by Digital Services Tax taxing the revenue, then Corporation Tax taxing the profit. Businesses who operate a model of a high volume of transactions with lower profit margins also bear a heavier burden. HMRC has provision for businesses to be exempted from payment if they can demonstrate that the activities in question are not profitable. Recommendation 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. 7 There are obvious challenges facing the OECD in implementing the multilateral Pillar One reforms to the planned timetable, which could have major implications for the future of the Digital Services Tax. Some other countries, including France for example, have also introduced new taxes similar to the UK’s Digital Services Tax, though they have varying scopes and tax rates. The introduction of such taxes reflects a wider desire for change and is a useful way of keeping up the pressure to introduce the OECD reforms. The timetable for implementation of the OECD reforms has already slipped once since the OECD announced agreement on the framework for the two-Pillar solution in October 2021. The OECD’s current timetable is for a multilateral convention signed by 140 tax jurisdictions in mid-2023, leading to implementation of Pillar One in 2024. This looks challenging and the ability to get key players on board is crucial. HMRC has not yet produced an estimate of revenue to the UK from Pillar One, telling us that too much is still uncertain about the new arrangements. HMRC says that the Office of Budget Responsibility’s estimate for annual revenues of £2 billion through Pillar Two is in line with high-level estimates from OECD. Recommendation 3: HMRC should update Parliament, within three months of international agreement on implementation of Pillar One, on progress with the implementation of the reforms. 8 HM Treasury and HMRC have a vital role in ensuring that the multilateral assurance framework for Pillar One and Pillar Two of the OECD reforms will meet Parliament’s desire for accountability and transparency. The 140 jurisdictions involved in the development and implementation of the reforms will have very differing cultures around the transparency with which tax systems operate and the approach to tax compliance activity, and differing levels of commitment to the reforms. The OECD reforms will be administered and enforced through a multilateral administrative framework which will change tax administration for multinational businesses and determine the approach to compliance actions. Success will depend on cooperation between countries hosting users and those hosting the businesses. HM Treasury and HMRC have a vital role in ensuring that the framework meets their objectives and the expectations of Parliament around accountability and transparency, and that these are reflected in the international agreement and the compliance regime. Recommendation 4: HM Treasury and HMRC should:
9 There is a significant risk that the Digital Services Tax may require extension beyond its intended lifespan, and that this could prompt changes in taxpayer behaviour. Should the OECD reforms be delayed beyond 2024, the Government is required by law to review the operation of the Digital Services Tax in 2025. We assume that the tax would continue in some form if possible but there is a question about its long-term sustainability. While there may be no evidence of active tax avoidance or evasion by businesses to date, this may change if the life of the Digital Services Tax is extended. Businesses such as those within the scope of the tax traditionally employ significant resources to ensure that their exposure to tax is minimised, and they may consider that the Digital Services Tax is more worthy of such attention if it is extended. Methods for ensuring compliance are untested and could require cooperation between countries. Recommendation 5: Ahead of the formal requirement to review the tax in 2025, HMRC should develop a contingency plan for what happens if the Digital Services Tax needs to be extended, including a robust process for addressing non-cooperation with its compliance regime. /ENDS Full inquiry information including evidence received can be found here Digital Services Tax |