Tax and the Digital Economy
Wendy Nicholls and Karen Robb
Technological advancements and digital capabilities are transforming the global economy. Specialist online companies that once operated in niche markets have now become established household names. The Government estimates that the global digital services market will be worth as much as the entire UK economy by 2020 and recent research by Oxford Economics and Virgin Media Business shows that digital capabilities generated £123 billion in business revenues, equivalent to 3.4% of GDP. However, the ability of governments around the world to tax companies in this new online marketplace has not kept pace. As a result, some businesses have found it challenging to comply. But what can they do to ensure that they operate within the letter and spirit of the law while also meeting public expectations and protecting their reputation?
While digital developments have undoubtedly created substantial growth, the accompanying tax regime is not fit for purpose, especially for businesses that also have an international presence.
In this new economic environment, we have seen a trend towards tax authorities around the world moving away from direct taxes (such as corporation tax) to indirect taxes (like VAT). Ultimately, to catch digital transactions and ensure governments’ collect their ‘dues’, authorities are moving towards a system where the consumer bears the cost. The biggest change to the international tax regime is the base erosion and profit shifting (or BEPS) project led by the Organisation for Economic Cooperation and Development (OECD) and the G20 group of industrialised nations. The changes recommended under BEPS aim to align taxing rights with relevant value-adding activity, improve transparency, and curb avoidance. It will fundamentally alter international tax rules.
Specifically, action one of this report indicates that best practice is for VAT to be collected where a business’ customers (consumers or organisations) are based, and not where the supplier is based – similar to the changes put in place across the EU earlier this year. This creates plenty of challenges for businesses operating in the digital space, of which complying with VAT regulations around the globe is only one issue.
While BEPS seeks to establish a common framework for international business, companies should remain aware of local developments in the countries in which they operate. This is a subjective area, and the complexity of the tax rules means it is difficult to judge what is too little and what is too much. It’s also important for groups to review and model the impact of the new rules on digital sales, given the amplified risks of “getting it wrong” and the potential detrimental impact on reputation. Company boards also need to be aware of tax in a way they never had to before.
The digital economy is redefining the UK and global marketplace and governments (and their tax systems) have often struggled to keep up. However, new regulations are being implemented that seek to capture these profits closer to where the value is generated but we expect there will be many more tax disputes that will arise between head office locations where ideas and technology originated, and newer markets. Companies should get ready for such disputes by getting to grips with the new tax regimes and ensure they operate both within the spirit and letter of the law. Crucially, they must also consider public opinion and the associated impact on reputation.
Read the full article and commentary in the online edition of CEO Magazine.
The full report, ‘The UK’s £92 billion Digital Opportunity’, is available from: www.virginmediabusiness.co.uk/DigitalOpportunity
Biographies: Wendy Nicholls and Karen Robb are Partners at Grant Thornton UK LLP, one of the world’s leading organisations of independent assurance, tax and advisory firms.