Documents considered by the Committee on 28 November 2018 Contents

14Digital Services Tax

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Select Committee

Document details

(a) Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services; (b) Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence; (c) Commission Recommendation of 21.3.2018 relating to the corporate taxation of a significant digital presence

Legal base

(a) Article 113 TFEU; special legislative procedure; unanimity, (b) Article 115 TFEU; special legislative procedure; unanimity, (c)—

Department

Treasury

Document Numbers

(a) (39585), 7420/18 + ADDs 1–3, COM(18) 148 ; (b) (39586), 7419/18 + ADDs 1–3, COM(18) 147; (c) (39590), 7421/18, C(18) 1650 final

Summary and Committee’s conclusions

14.1Current global tax rules were designed for ‘brick and mortar’ businesses and have not kept pace with the changing nature of value creation in the digital economy, in which intellectual property, users and data are paramount. One consequence of this mismatch is that it is possible for digital providers to have a substantial economic presence in a country but to pay very little tax in it.

14.2Digital economy businesses, on average, pay significantly lower levels of tax within the EU than traditional brick and mortar businesses. The European Commission’s statistics suggest that the effective average tax rate for digital business models in the EU28 (8–10% on average) is less than half that paid by traditional business models (which pay an average of around 23%).94 As digitisation of the economy accelerates and extends into traditional sectors of the economy (e.g., hospitality, transportation) the implications for Member States’ tax bases are potentially significant.

14.3The Government and the European Commission have both arrived at the view that multilateral action is needed to tackle this issue, and had hoped that the OECD’s Task Force for the Digital Economy’s (TFDE) interim report to the G20 in spring would present meaningful policy options. However, following the failure of the TFDE report to do so, the Commission brought forward two legislative proposals in March 2018:

14.4Both proposals are explained in detail in the background section of our report of 13 June 2018;96 however, this report focuses on Directive (EU) 7420/18 establishing a Digital Services Tax (DST), on the basis that the Austrian Presidency has prioritised this proposal.

14.5In the Government’s initial response to the Commission’s proposal,97 the Chief Financial Secretary to the Treasury (Mel Stride) indicated that the proposed DST conformed to the principal of subsidiarity, as there were “significant benefits to interim solutions such as a revenue-based tax being implemented on a multilateral basis”. The Minister expressed support for central aspects of the proposal, including the fact that it would apply exclusively to revenue streams through which user participation generates revenue for businesses, and the fact that businesses below a certain threshold98 would not be subject to it. However, the Minister indicated that further work was needed on other points, including whether the scope of the measure could be made more targeted, whether the Commission’s suggested revenue thresholds were appropriate, and whether the Commission’s proposed flat 3% rate was the most appropriate level.

14.6The proposal was debated on the floor of the House as part of a Conservative-led debate on Digital Taxation,99 in which the alignment of the Commission’s proposals with the Treasury’s own proposals was noted.

14.7In its report on the proposals on 13 June 2018100 the Committee acknowledged the similarities between the Government’s thinking and that of the Commission, and that unanimity would required for both proposals in the Council of Ministers, meaning that, ultimately, it was unlikely that either proposal would be agreed. The Committee also asked the Minister a number of questions about the proposals and EU exit.

14.8On 21 July 2018, the Minister wrote to the Committee101 to provide responses to the questions contained in its report:

14.9The Minister stated that the UK could in principle introduce a similar measure to the DST unilaterally, and that if it was identical to the DST the theoretical yield would likely be similar in both cases, as the UK would be asserting a taxing right on revenues from the same set of services. Asked what proportion of the estimated €5bn overall yield from the DST would accrue to the UK, the Minister noted that €5 billion was the upper limit of the Commission’s estimates, and cautioned that, although the Commission estimated that the UK would account for 30% of the yield, it was not advisable to assume that the UK would receive 30% of the €5bn estimate (€1.5bn).

14.10On 21 November 2018 the Minister provided the Committee with a further update,102 in which he said that, based on the latest version of the ECOFIN agenda, Directive 7420/18 might be put to a vote in December.

14.11In his update, the Minister states that the overall text of the Directive remains subject to negotiation in several areas, including the date at which the Directive should be transposed, a potential sunset clause, and the appropriate scope of the Directive. However, he does not provide any information about the nature of negotiations on these points or the outcomes which would be acceptable to the Government. In line with the Government’s explanatory memorandum and subsequent updates, he indicates that the Government would be willing to support changes that would ensure only a targeted and proportionate Directive is agreed, which would involve ensuring that the scope is focused on those activities which derive material value from user participation. On this basis the Minister requests that the Committee grant a scrutiny waiver so that he can support the proposal at Council, “subject to getting the detail right.”

14.12The Minister has written to inform the Committee that the Austrian Presidency may seek a vote on Directive 7420/18, which would take place at ECOFIN Council on 4 December 2018, and requests a scrutiny waiver so that he can participate at Council.

14.13The Minister has previously indicated the Government’s support for aspects of the proposed Digital Services Tax, and the Chancellor recently announced that the Government intended for its own Digital Services Tax to be introduced from April 2020. The Minister indicates, in broad terms, that the Government would be willing to support changes that would ensure that only a targeted and proportionate Directive is agreed, which would involve ensuring that the scope is focused on those activities which derive material value from user participation, “subject to getting the detail right.”

14.14While we accept this overall position as reasonable and in line with the Government’s previous updates, the Minister also refers to a number of aspects of the proposal in relation to which negotiations are ongoing, which include the transposition date, a potential sunset clause, and, most importantly, the scope of the Directive. The Minister provides little information regarding the specifics of the negotiations on these points or of the outcomes which would be acceptable to the Government. This is disappointing, particularly given that there have been reports in the media regarding the sunset clause proposed in the latest compromise text (a period of ten years is reportedly suggested),103 and suggesting that text has been added to the Directive to clarify that the supply of regulated financial services by regulated financial entities is excluded from scope.104 Nor does the Minister provide any further clarity regarding points which the Government had previously indicated were of importance to it in the negotiations, including how the question of “revenue pass-through” has been addressed,105 whether the Commission’s suggested revenue thresholds are appropriate, whether the scope of the Directive is appropriate or should be more targeted, and whether the Commission’s proposed flat rate 3% rate is the most appropriate level.

14.15Although we do not currently take issue with the broad shape of the proposal itself, which appears to conform in its essential features to current UK policy, and are inclined to consider that, in the context of EU exit and given the contentious nature of this issue internationally, it would be helpful to the UK if the EU Member States were also to introduce a Digital Services Tax, we are nonetheless not willing to grant a scrutiny waiver on the basis of the limited information provided.

14.16We have taken note of the Minister’s assessment that if the UK introduces a Digital Services Tax unilaterally when it is no longer an EU Member State the theoretical yield would likely be similar, as we would be asserting a taxing right on revenues from the same set of services.

14.17We retain the documents under scrutiny and ask for a more detailed update covering the above points in advance of any further vote. We draw this report to the attention of the Treasury Select Committee.

Full details of the documents:

(a) Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services: (39585), 7420/18 + ADDs 1–3, COM(18) 148 ; (b) Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence: (39586), 7419/18 + ADDs 1–3, COM(18) 147; (c) Commission Recommendation of 21.3.2018 relating to the corporate taxation of a significant digital presence: (39590), 7421/18, C(18) 1650 final.

Previous Committee Reports

Thirty-first Report HC 301–xxx (2017–19), chapter 4 (13 June 2018); Fifth Report HC 301–v (2017–19), chapter 10 (13 December 2017).


94 See Fifth Report HC 301–v (2017–19), chapter 10 (13 December 2017).

95 HM Treasury, Corporate tax and the digital economy: position paper update (March 2018).

96 Thirty-first Report HC 301–xxx (2017–19), chapter 4 (13 June 2018).

97 Explanatory Memorandum submitted by the Treasury (4 May 2018).

98 Two thresholds would have to be met for a company to be subject to the tax: the company or the consolidated group to which it belongs would have global revenue from all sources of €750mn a year; and the company or the consolidated group to which it belongs has revenue taxable under the DST of €50mn (£44,207,500) a year in the EU.

99 HC Deb, 27 March 2018, volume 638.

100 Thirty first Report HC 301–xxx (2017—2019), chapter 4 (13 June 2018).

101 Letter from the Minister to the Chair of the European Scrutiny Committee (21 July 2018).

102 Letter from the Minister to the Chair of the European Scrutiny Committee (21 November 2018).

103 Politico Pro, “EU digital tax set for 10 year lifespan” (15 November 2018).

104 Politico Pro, Financial firms to be exempted from EU digital tax (20 November 2018).

105 In some cases, suppliers of (for instance) online advertising may record revenues which include money that is passed directly on to a host website but recorded as a separate payment. The Government indicated in its explanatory memorandum that it may or may not be appropriate to charge tax on the whole amount of such revenues.




Published: 4 December 2018