In an interview published on 10 August 2018 the UK Chancellor of the Exchequer stated that large online retailers should be subject to a new tax on their revenues in the UK. This would aim to ensure fair taxation between high street retailers and large technology companies. As the large online businesses are international companies this would require renegotiation of international tax treaties. The Chancellor suggested however that if there is no international agreement to impose a tax based on revenues the UK may need to consider temporary tax measures to ensure fairer taxation of online retailers.
Consideration of the new tax has arisen against the background that online retail sales are growing and that the UK has the largest percentage of online shopping among the main developed economies.
The UK issued a paper in March 2018 outlining possibilities for taxing online businesses on user-created value even if they did not have a presence in the UK. The European Commission has also published proposals on aligning taxation of online businesses more closely with the location where value is created by users. The European Commission envisaged a long-term solution involving taxation of profits of a virtual permanent establishment and an interim measure where tax would be based on a percentage of revenues from certain digital activities.
European Commission proposals
On 21 March 2018, the European Commission proposed new rules to tax certain digital business activities. Current tax rules fail to recognise the new ways in which profits are created in the digital world, in particular the role that users play in generating value for digital companies. As a result, there is a disconnect between the country where value is created and the country where taxes are paid.
Tax on Profits from a virtual permanent establishment
The European Commission’s first proposal, which is its preferred long-term solution to the issue, would allow Member States to tax profits generated in their territory, even if a company does not have a physical presence there. A digital platform would be deemed to have a taxable digital presence or a virtual permanent establishment in an EU Member State one of the following applies:
- It exceeds a threshold of EUR 7 million in annual revenues in a Member State;
- It has more than 100,000 users in a Member State in a taxable year; or
- Over 3000 business contracts for digital services are created between the company and business users in a taxable year.
This would better reflect the ways that companies create value online by taking account of where the user is based at the time of consumption, thereby linking where the users are based with where the companies are taxed.
Interim tax on revenues from certain digital activities
A second European Commission proposal related to an interim tax on digital activities to ensure that activities that are currently not effectively taxed would begin to raise tax revenue for Member States. This interim indirect tax would apply to revenues (rather than profits) created from certain digital activities. This would be an interim measure and would include mechanisms aiming to avoid the possibility of double taxation.
The tax would apply to revenues from activities in which the users have a significant role in value creation such as revenues created from selling online advertising space; revenues from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them; and revenues created from the sale of data generated from user-provided information.
The resulting tax revenues would be collected by the EU Member States where the users are located, and would only apply to companies with total annual worldwide revenues of EUR 750 million and EU revenues of EUR 50 million. The European Commission has estimated that EUR 5 billion a year in revenues could be raised for Member States if the tax is charged at a 3% rate.
