The Chartered Institute of Taxation (CIOT) has urged governments to implement already agreed measures to improve how all multinational companies are taxed and to focus on how value in highly digitalised supply chains is recognised and taxed rather than introducing separate, unilateral ‘digital taxes’, especially those based on sales not profits.
The CIOT was responding to an OECD request for input on its work regarding the Tax Challenges of the Digitalised Economy.1 The Institute set out its concerns at the potential application of withholding tax to digital transactions and ‘equalisation levies’ (revenue based taxes).2 These would lead to greater complexity, the likelihood of double taxation on the same profits and, potentially, be a negative influence on further innovation by companies.
John Cullinane, CIOT Tax Policy Director, said:
“There are reforms already underway and agreed through consensus by countries which attempt to address the taxation of all multinational companies, including those usually thought of as ‘digital’. We urge governments to hold their nerve and make sure these agreed reforms work and have a wide take up before attempting further fixes that risk upsetting attempts at global solutions.
“Digitalisation should be encouraged as a driver of innovation and growth. Changes to taxation should seek to ensure that this innovation and growth is not discouraged or inhibited by a fear of double taxation.
“Withholding taxes and taxes on revenue such as equalisation levies are blunt instruments that are likely to give rise to double taxation and may risk stifling innovation as taxes may become payable before profits are made.”
The CIOT appreciates the reasons behind asking whether a company can have a ‘digital presence’ in a territory. However, the starting point for profit attributable to a country where a sale is made but there is no physical presence, should be zero, it says. The value of the item in a market is not changed by its mere sale.
John Cullinane explained:
“In order for a digital presence to be recognised, a factor beyond simply making a sale would need to be identified; doing that may not be straightforward, and even where it could be done, could lead to an administrative and compliance cost disproportionate to any tax collected.”
The call for governments to hold their nerve comes amid mounting public debate about the taxation of digital multinational companies.
John Cullinane said:
“CIOT is supportive of initiatives internationally to ensure tax is paid where value is really created. We want to see a level playing field for all taxpayers, wherever they come from and whatever their size.
“Sales into one country generated by activity in another are as old as the existence of internationally traded goods, and long predate the internet.”
The CIOT sees merit in work on considering whether the definition of and attribution of value to supply chains with a significant degree of digitalisation can be improved. This can be done within the existing framework, which include safeguards to prevent double taxation of the same profits, and dispute resolution mechanisms, it argues.
John Cullinane continued:
“Multinational companies’ profits are a source of a lot of tax globally and countries such as ours, which are very exposed to international competition, nevertheless succeed in getting a good deal of this. International cooperation to plug gaps is improving and a great deal of the perception to the contrary is now due to what happens in one jurisdiction, the USA. The USA tax system is now unusual in effectively allowing multinational companies based in the USA to shelter much of their profits offshore. To this extent it can be argued that any material loss of tax is at the expense of the USA exchequer, and only by reference to the relatively high USA headline rates. Nevertheless, this ought to be tackled; and we take some comfort that the latest proposals for tax reform in the USA indicate that this will happen. It is very important for the integrity of the international tax system that there is delivery on this, otherwise the clamour for other fixes will only grow.”
Notes for editors
1. The CIOT’s submission to the OECD can be viewed here.
2. Both options put forward in a European Commission paper, A Fair and Efficient Tax System in the European Union for the Digital Single Market, published 21/9/17.
3. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)More Articles by Chartered Institute of Taxation (CIOT) ...