This is not a base erosion issue but a new question on how global corporate taxation should respond to a completely different business model. The G20 asked the OECD to re-form the Digital Taskforce and present a report to the G20 in April. The EU pushed forward with its own initiative for an interim turnover-based tax but neither body has produced much documentation yet on the possible rationale. The UK's November position paper was thus a useful contribution and the government has issued an updated version, following comments received.
The government continues to favour a new allocation of profit model, where part of a group's profit is allocated to countries where users are based. This is intended to reflect the depth of user contribution to the profit model of the technology company and the new paper suggests that data alone should not be sufficient to trigger a presence and profit allocation. Instead, it is looking for business models where the collection of data from users results from a much broader and more active user relationship, which is central to how those businesses create value. Examples of business in this area are online networks such as social media platforms, search engines, file-sharing platforms and online marketplaces.
One major difficulty is that there is no easy way to measure or determine value and certainly no global consensus. This is blithely acknowledged and the paper simply suggests an unspecified percentage of global profit be allocated to user locations, based on residual value after allocating profit elsewhere. Variations should be allowed to reflect differing contribution value but without any real idea how business and tax authorities should determine actual amounts.
The US Treasury indicated last month that it would be prepared to discuss this issue, but only as part of a wider review of taxable presence rules. Global agreement would be needed, since the law defining taxable presence is set out in the world's 3,000 double tax treaties.
The UK continues to support the EU's position that a tax on sales is needed in the interim, pending broader change. Two areas are considered, as in the first position paper: advertising and platforms that earn commission. In the case of online advertising the government envisages that the UK would have a right to tax revenues from online advertising targeted at UK users of an in-scope online platform. It is acknowledged there are more difficulties in applying the tax to an intermediation platform that is facilitating cross-border transactions, since both suppliers and customers contribute value. It suggests some form of multilaterally-agreed split.
Business profitability varies wildly, and a new tax could apply to large or small loss-making businesses. There are examples of some businesses that have been forced to withdraw from markets due to high taxes on sales. The paper suggests three options to deal with these concerns.
The first is setting a high threshold for global turnover before any revenue-based tax is triggered (which is the anticipated position of the EU, based on a leaked draft directive). The second would be to set the tax rate at a low level, such that it is not overly burdensome to loss-makers of low-profit makers. This may not meet the clamour from some for taxation of highly-profitable businesses. The final option is some complicated safe-harbour rule, which presumably could provide some form of exemption, or repayment of tax to defined loss-makers.
The next step in this area will be a proposed Directive from the European Commission at the end of March, followed by the OECD paper for the G20 meeting in April. The government invites additional comments on its latest paper, without any deadline.
Bill Dodwell is head of tax policy at Deloitte