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Taxing the Digital Economy

12 December 2017

The tax affairs of large online companies such as Amazon, Apple, Google, Facebook and others have attracted a huge amount of media and political attention over recent years and helped create the impetus for the OECD’s work on Base Erosion and Profit Shifting (BEPS), which resulted in changes to international tax rules. In spite of the huge efforts that went into BEPS, governments still feel that they need to do more to address the taxation of companies participating in the digital economy, and recent months have seen announcements of potential new taxes from several quarters, including No 11 Downing Street.


United Kingdom

The Chancellor announced a consultation on the taxation of the digital economy in his recent Budget. The position paper published on 22 November proposes a tax on the revenues of certain businesses providing digitised services to the UK market, citing supposed shortcomings of the international tax rules and growing public dissatisfaction. However, it suggests that it only wishes to target certain business models that provide (mainly free) services to a large UK user base:

  • Social media sites, platforms for user-generated content or search engines, that leverage their user base to sell advertising
  • Online market places and exchanges that make money from commissions.

Additionally, in a further consultation document (reviewed at Royalties withholding tax), the Government intends to charge a tax on certain royalties paid to companies in low tax, or no tax, countries.

There are a number of difficulties in the Government’s position paper. It is based on the proposition that significant extra value is generated in the UK from the user base built up by some online businesses, without acknowledging that a compelling user experience has to be created by the company to attract and retain users in the first place. Similarly, the raw data associated with users has no value unless it can be analysed and, again, the techniques and know-how required to do that may well be developed and exercised elsewhere.

It is also hard to see how legislation can be drafted to draw a line between the types of business the Government wishes to tax and others. For example, the line between social media and traditional media looks increasingly blurred, as the latter have moved online, adopting ‘clickbait’ methods and encouraging user interaction. At the same time, while platforms such as YouTube have a vast amount of amateur content generated by ordinary users, viewing is increasingly dominated by professionally-generated content.

We believe that a tax on revenues is not a fair way to tax the value generated by such activity, even if it is accepted that a UK user base is involved in the creation of value. In the long run, the value of a business is dependent on the profits it generates rather than its revenues. A revenue-based tax results in a loss-making business paying the same level of tax as a profitable business with the same turnover. It will penalise and deter new start-ups from offering services to the UK market. Further, it will lead to double taxation to the extent that these companies are paying tax on their profits in the countries where they are based.

We would expect that a tax on revenues will be outside the scope of the many double tax treaties the UK has negotiated with other countries. However, taking unilateral action in international tax matters risks inviting retaliatory responses from other countries. Although the companies that come to mind first when considering the digital economy may be American, there are of course some very large UK businesses with an extensive online presence. British media groups including, for example, the BBC, the Guardian and the Daily Mail all derive revenues from providing a free-to-use service to international audiences. They will all use, to some degree, techniques to track users which will help determine the adverts displayed. It would be dismaying if other countries decide to impose similar revenue-based taxes on UK groups. We note that the position paper does not say whether the Government would expect to allow any company double tax relief for any such foreign taxes. Doing so would, of course, effectively reduce the UK tax take.

It is not clear whether the tax would be imposed within the UK, on UK resident companies. If it is not, then the new tax would discriminate against foreign companies and would risk falling foul of not only EU rules but potentially other treaty commitments.

The irony is that these proposals have been tabled at a time when it seems more likely than ever that the US will reform its tax system, in the process taxing the foreign profits of the tech giants that have so far enjoyed a low level of taxation. Furthermore, the BEPS reforms have only recently been implemented and should be given a chance to succeed before they are condemned as inadequate. Further changes to the international tax rules are also being considered, as set out below, so unilateral moves to tax the digital economy may be completely unnecessary.



Firstly, the OECD itself has continued to consult on options for reform and its Task Force on the Digital Economy issued a consultation in the autumn, seeking comments on a number of alternative proposals:

  • Creating a new threshold where companies will be subject to tax on profits in a country where they have a ‘significant economic presence’ (how this is to be defined is subject to comment) even if they lack a permanent establishment
  • New withholding taxes to be deducted at source from payments for online supplies of services/goods
  • A digital equalisation levy, based on turnover rather than profit, that taxes ‘insufficiently taxed’ profits.



The EU is encouraging the OECD to propose reforms to the tax system, but has also indicated that it will consider adopting unilateral measures in the interim such as:

  • An equalisation tax on turnover of digitalised companies
  • Withholding tax on digital transactions
  • A levy on revenues generated from the provision of digital services or advertising activity.

A number of EU member states oppose the introduction of these new taxes. EU law currently requires member state unanimity to introduce tax changes, although the possibility of making them subject only to qualified majority voting has recently been mooted by EU Commissioners.



Italy has prepared a draft Finance Bill that could see the introduction of a 6% tax on the Italian revenues of certain online businesses. However, there is little detail as yet on the scope of the new tax and it is, therefore, not clear what types of activity would be subject to a charge.

For help and advice on international tax issues please get in touch with your usual BDO contact or Tim Ferris.