Tech giants looking for ways to wriggle out of UK digital tax, watchdog warns
Delays to OECD plan means interim fix could be found wanting
Britain's parliamentary spending watchdog has warned that tech giants are set to "circumvent" the government's digital tax regime despite what appeared to be a successful introduction.
In a report published today, the Public Accounts Committee (PAC) said that tax receipts for the first year (2020-21) of the UK's Digital Services Tax (DST) – designed as a temporary measure before an international system is introduced – were 30 percent more than the £275 million forecast.
However, the committee said it was concerned the success may mean the tech giants intended to be caught within the regime could use "the huge resources and expertise at their disposal to circumvent the tax."
The UK tax authority, His Majesty's Revenue and Customs (HMRC), "will need to be ready for that scenario, with robust measures to ensure compliance in the longer term if needed," the report said.
The DST arose from concerns that tech giants doing business online – such as Amazon, Google, and eBay – are taxed based on the location of the business while they profit from trade with UK citizens online, arguably denying the public sector of rightful revenue and putting UK businesses at a disadvantage.
The Organisation for Economic Co-operation and Development (OECD) is set to introduce its Pillar One rules to tackle this problem globally, but the UK implemented its own tax system as an interim measure.
While noting the success of the first year, the PAC said HMRC had told it that Office of Budget Responsibility forecasts proved inaccurate because online businesses benefited from COVID-related lockdowns that coincided with the tax's introduction.
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Meanwhile, the OECD plan was delayed last year and, amid prospects of a further delay, the PAC was concerned HMRC was unprepared.
"We saw little evidence to support the confidence expressed by the departments in evidence to us that the OECD reforms will be implemented to the current timetable. The proposed reforms are complex and rely completely on agreement being reached across around 140 tax jurisdictions," the report said.
Sarah Olney MP, lead on the PAC inquiry, said: "We were very pleased to see HMRC finally getting to grips with the realities of taxing multinational corporations, after years of PAC recommendations on this. But the Revenue needs to up its game on compliance – especially across jurisdictions – about how the tax will actually operate, over what will likely be years more before a proper international tax is fully operational."
The PAC found that around 90 percent of the total DST revenues (£358 million) for 2020-21 in the first year were provided by five business groups, although it declined to name them. But 11 of the 20 business groups that HMRC initially expected to make a payment determined they did not owe any DST. Eighteen paid in total.
"HMRC has yet to identify any non-compliance and it is not yet clear if HMRC has captured all groups that should be within scope for the tax," the report said. "HMRC could still face challenges ahead with enforcing compliance, especially among groups without a physical presence in the UK. It will need to manage a larger population of business groups across a wider range of business activities than it initially expected. HMRC will need to ensure good levels of compliance to maintain DST as a credible alternative until the OECD Pillar One reforms come into effect."
A spokesperson at HMRC, said in a statement:
"The Digital Services Tax has proved highly effective at taxing the UK revenues made by online businesses ahead of new international rules. Profit-shifting by multinationals is separate issue and the government has taken significant steps to tackle it.
"HMRC has an extremely strong track record on multinational tax compliance and actively challenges them on tax due. Between 1 April 2016 and 31 March 2022 HMRC brought in over £66bn by effectively policing the tax rules as they apply to the largest businesses." ®