‘Temporary’ Digital Services Tax risks becoming permanent
Commenting on the Public Accounts Committee’s report on the Digital Services Tax, published today, the Chartered Institute of Taxation (CIOT) has said that there is a ‘real risk’ that the supposedly temporary tax could effectively become a permanent part of the UK’s tax landscape.
John Cullinane, CIOT’s Director of Public Policy, said:
“This report shines a welcome light on the Digital Services Tax three years after it came into effect.
“By some measures the tax has been a success – as the PAC points out it raised 30 per cent more than expected in its first year. However, the fact that the tax still exists – and has no immediate prospect of repeal – represents a failure.
“The Digital Services Tax was only ever intended as a stopgap – and with good reason. As we pointed out in our evidence to the committee, a revenue tax such as this is a blunt instrument that cannot accurately represent the tax on the profits generated in the UK. It will inevitably over-tax some companies and under-tax others. It is also highly controversial internationally, especially with the United States, home of a number – perhaps a majority – of the companies affected.
“But there is little sign of a breakthrough in the OECD talks on allocation of taxation rights that all major trading partners will be able sign up to, which we are hoping will produce the agreement that will enable the UK Digital Services Tax – and its equivalents elsewhere – to be scrapped.1
“Given the complexity of reaching agreement on allocation of taxing rights internationally and in then ratifying the treaty in a sufficient number of countries, we have to face up to the real risk that the tax could become effectively permanent.
“The PAC’s report poses some sensible questions about the problems this may create in terms of incentives and compliance – although the Digital Services Tax is a very small fraction of the overall tax bill that multinational corporations will be paying, so we should not overestimate the effort they are likely to put into reducing their bill. In any case they are likely to seek to pass on their costs to advertisers and traders.
“However, the bigger concern should be the reaction of the United States, in particular, if the OECD talks do not achieve a consensus. The US feels measures such as the Digital Services Tax unfairly target American companies and has in the past threatened retaliation against countries which adopt them.
“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 PAC’s report also recommends that “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”.
John Cullinane commented:
“While we should always be ready to learn lessons, it is unclear that there are many lessons that can be learned for the introduction of future taxes from a levy which only has 18 taxpayers – and with 90 per cent of the revenue coming from just five of them.
“While the Digital Services Tax brought in more than expected in its first year that was still just a twentieth of one per cent of the tax take in that year. Corporation tax raised 150 times more and income tax 550 times more.
“All the big revenue raisers have lots of taxpayers. We think that HMRC, the Government and the PAC should focus on improving HMRC service levels, which is now essential to the collection of revenue as well as to the health and prosperity of business and individual taxpayers, and not be tempted to pursue the illusion that deficiencies in delivering the major taxes can be made good by new taxes targeting tiny numbers of taxpayers, even if they are very large taxpayers.”
