The Digital Services Tax
The Treasury has announced plans to introduce a Digital Services Tax (“DST”) from April 2020, which it anticipates will raise £1.5 billion over four years.
The introduction of the DST reflects the UK’s discontent with the taxation outcome of certain highly digitalised businesses under the current international tax framework. The view is that the DST will act as a short term solution to the tax challenges of digitalisation while a global consensus-based solution is designed and implemented within the EU, G20 and OECD. Due to its interim nature, the DST will be subject to formal review in 2025.
The DST will apply a 2% tax on the revenues of three specific in-scope digital business models: the provision of a search engine, social media platforms, and online marketplaces. The tax has a broad nexus rule focusing on the location of the user, not the business. This means that the DST will apply to the revenues of both resident and non-resident enterprises, irrespective of their level of physical presence in the UK, whenever they are linked to UK users. However, the DST is intended to target large tech companies only. As a result, only large businesses which generate at least £500m from in-scope business models will be subject to the DST.
The stated intention is for the DST to operate outside the scope of tax treaties. This hints at the view that the DST will not (either as matter of form or substance) be designed as a tax on income or any element of income covered by Article 2 (Taxes Covered) of the OECD Model Tax Convention. By operating outside tax treaties, major non-resident tech companies will be unable to credit the DST charge against income tax imposed by their country of residence.
Compliance with EU law will be required if the transition period proposed in the draft Brexit Withdrawal Agreement is agreed upon. In particular, the DST must be compliant with the fundamental freedoms set out in the TFEU and the prohibition on State aid. It should be noted that the CJEU currently has two requests for a preliminary ruling concerning the application of Hungary’s advertisement tax to Google (C-482/18) and Vodafone (C-75/18). Hungary’s advertisement tax is also a unilateral measure aimed at addressing the tax challenges of certain digitalised businesses (online advertising services) and, like the DST, the scope of Hungary’s advertisement tax is also ultimately dependant on the location of the targeted public.
The End is Nigh for the Non-Dom Regime
Published in ThoughtLeaders4 Private Client Magazine, Helen McGhee expert analysis of the current state of non-dom tax regime and it's future.
HMRC Makes Changes to COP9
On 14 June 2023, HMRC published a substantially rewritten Code of Practice 9 (“COP9”). Helen McGhee and Megan Durnford set out the key changes implemented as a result of this publication.
Pandora Papers: HMRC issues nudge letters
The Pandora Papers leak of almost 12m documents back in 2021 purportedly exposed the secret accounts and dealings (including potential tax evasion/ avoidance and money laundering) of 35 world leaders (including the late HM Elizabeth II), as well as many politicians and billionaires. The data was obtained by the International Consortium of Investigative Journalists in Washington DC and led to one of the biggest ever global financial investigations.
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Tax-Related Measures in the Autumn Statement 2022
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This note focuses on tax measures included as part of that statement.