UK Digital Tax May Outlive Global Agreement

Law360 (July 25, 2019, 7:40 PM EDT) --


The temporary nature of the U.K.'s digital services tax signals that the British government hasn't given up on eventual global rules, but there's also no guarantee that the levy will be dropped even after a multilateral agreement is reached.

A statement from HM Treasury that accompanied this month's release of draft legislation on a British digital services tax called the measure “proportionate, targeted and temporary.” (Getty Images)

Earlier this month, HM Treasury released a draft of legislation that would require large companies to pay a 2% tax on revenue from digital services used by people in the U.K., such as a social media platform or an internet search engine. At the same time, the British government maintained that “the best solution” is to revamp international rules and said it would continue to work with the Organization for Economic Cooperation and Development on a globally agreed-upon approach.

Some specialists believe that the British government will drop its levy after multilateral rules are created. Others say that depending on the outcome of the OECD's digital tax project, the U.K. might feel inclined to keep its domestic measure.

If the OECD were to agree on a broader approach that didn't address user contributions as the U.K. tax does, the government might end up keeping its own tax, according to Jeff VanderWolk, a partner at Squire Patton Boggs LLP.

“Maybe the U.K. would just say, fine — we'll go along with the OECD, but we're not going to repeal our own legislation, which deals with something else,” he said.

The U.K. is one of several countries — including France, Italy and Spain — that have moved ahead with unilateral measures designed to capture revenue from businesses that have digital operations in a jurisdiction, but no taxable footprint. Meanwhile, the OECD is working to develop global rules for the digital economy and is facing a deadline at the end of 2020.

First announced in the U.K.'s 2018 budget, the country's digital services tax, or DST, is “proportionate, targeted and temporary,” according to a statement from HM Treasury that accompanied the release of the draft legislation on July 11.

HM Treasury said the measure would ensure that large digital businesses pay a tax that reflects the value derived from British customers. The legislative draft calls for a review of the tax by the end of 2025.

This month, the U.K. published its response to a consultation on the measure. The government noted that while it's committed to removing the tax once an international solution is in place, such a solution “would need to address the specific policy concern that has been identified by the U.K.”

Some have read this comment, along with the lack of a sunset clause in the draft legislation, to suggest that the digital services tax could remain intact depending on the pace and outcome of the OECD's project.

James Hill, head of Mayer Brown LLP's London tax practice, said these factors “would indicate that there is every chance that the DST could be retained beyond 2025 if global progress is slow and/or any global solution does not address the U.K. government's view of how a DST should work.”

Upon reviewing the tax, the U.K. might also see revenue incentives to keep the measure, according to Robert O'Hare, a senior tax policy adviser at Squire Patton Boggs.

“HM Treasury might think, ‘We're getting a lot of money; maybe we should raise the rate or increase the scope or reduce the threshold,’” he said.

If the U.K.'s digital services tax lasts longer than intended, it wouldn't be the first time such a thing has happened. A report published in February by a European Parliament policy department noted that the U.K.'s corporate income tax, which was introduced as an interim measure during the Napoleonic Wars in the 19th century, remains in place to this day.

Others, however, predicted that the U.K. would follow through with its promise to repeal the tax if a global solution is reached. To do otherwise would undermine the country's role at the OECD, suggested Monika Loving, an international tax services partner at BDO USA LLP.

“Both the U.K. and France have a very active part in that broader OECD conversation,” she said. “I think they have opportunities to give input in that process in the way they've been active participants so far.”

Danny Beeton, of counsel at Arendt & Medernach SA, similarly said the U.K. is a follower of the OECD, in part because the country has always had a large role in drafting the organization's documents.

As for the digital services tax, the U.K. measure “would never continue if it was different from the OECD conclusion because it's an interim measure pending an OECD conclusion,” he said. “They've allowed five years, but it could be five months. It depends on when an OECD conclusion is reached.”

Beeton said the measure's features indicate that the tax will be dropped when a multilateral approach is reached.

He noted that the draft legislation reduces a company's corporate income tax by the amount it pays under the digital services tax. In addition, businesses don't need to pay the tax on their first £25 million ($31 million) of U.K. revenue.

“They've tried to minimize the impact and introduce it as a principle, just to say, ‘We share the concerns about digital businesses not paying tax,’” he said. “A lot of it is hot air. It's signaling.”

Like the U.K., France and Spain have indicated that their digital services taxes are meant to function as interim measures until a multilateral approach is agreed on.

In fact, none of the unilateral measures are supposed to overlap with the digital taxation approach that the OECD reaches, according to Tommaso Faccio, head of secretariat at the Independent Commission for the Reform of International Corporate Taxation.

These independent measures put more pressure on other countries to reach a global consensus, he said.

“If there is no consensus, then we're back to the drawing board,” he said. “Countries will all have to act unilaterally.”

There's a risk that focusing on unilateral measures could take countries away from the multilateral process, according to Duncan Edwards, the chief executive officer of BritishAmerican Business, a trans-Atlantic trade, policy and advocacy organization representing some 500 member companies.

“The patience with the multilateral process is wearing out,” he said, noting that progress has been “glacial” at the OECD. “My view is that the governments and the businesses themselves need to double down and reengage in that process.”

Meanwhile, the debate over whether it's possible the U.K. will keep its digital services tax might be moot. Due to the political climate in the country right now, there's a chance the legislation might not go through at all.

Boris Johnson, who took office as prime minister on Wednesday, will doubtless have his own legislative priorities, said Robert Sharpe, a senior associate at Clifford Chance LLP.

Although Johnson spoke about “taxing the internet giants on their income” during his campaign, he's expected to be more business-friendly and seek closer relations with President Donald Trump and the U.S. than his predecessor, Theresa May, according to Sharpe.

“Whether he will seek to implement the DST remains to be seen,” he said.

The U.K.'s impending departure from the European Union could also keep the legislation from passing.

Beeton of Arendt & Medernach noted that due to Brexit, the U.K. government will need to make the country, including its tax policies, as attractive to investors as possible. He added that Johnson's friendship with Trump is also an important factor.

“We need a trade deal with America,” he said. “It's very important and I think that is a big reason why we may not go ahead with the legislation next year.”

--Additional reporting by Matt Thompson and Todd Buell. Editing by Robert Rudinger and Neil Cohen.