Wendy Nicholls, Tax Partner, Grant Thornton UK LLP comments on the Chancellor’s budget:
“Philip Hammond’s announcement on the extension of withholding tax to royalties paid on sales to UK based customers (even where the payor is a non-UK country) is an attack on the digitalised businesses that may not have a full physical presence here. The detail is yet be consulted upon but it will need careful consideration if the government wants to maintain the volume of business these companies do with both UK consumers and businesses.
“The measure is due to be implemented in April 2019 and is forecast to raise only £800m across the four years, with £285m set to be raised in the first year. This is very small in economic terms; however, it may be seen as enough to amend the behaviour of some multinationals
“The announcement implied that the UK will act alone if the international community moves too slowly. Worryingly, this is in line with several EU countries, spearheaded by France and Italy in proposing their own ‘digital equalisation levy’. These proposals are a concern, as they diverge from the international consensus approach the OECD tries hard to maintain.
“There are also echoes here of the UK’s own infamous Diverted Profits Tax (DPT), which imposes a higher rate of corporation tax on profits deemed to be diverted out of the UK. The budget papers defend DPT by saying Australia has copied it, however, there are views that Australia simply retaliated against the UK’s DPT by bringing in its own version.
“So far DPT has also raised very little revenue, and HMRC statistics on this area are inflated by what they describe as changed behaviour, and by the fact that DPT is a ‘pay now, argue later’ tax. Even so, HMRC has invested in resourcing up a task force in this area by hiring/redeploying 60 experienced inspectors to tackle DPT cases. In many cases, these are companies that were not originally expected to be targeted, ranging from large UK headquartered groups, through to mid-sized businesses.
“The UK has to tread a fine line between being seen to be tough on multinationals and showing it is open for business, particularly as we prepare for a post-Brexit economy. One of the reasons that innovative businesses are attracted here is the combination of a stable tax regime and an even-handed approach. The UK has rightly prided itself on being at the forefront of international efforts by the OECD and G20 to tackle base Erosion and Profit Shifting (BEPS). Currently, the OECD working parties are looking at taxation of the digital economy and the UK is an active participant there. We believe now is the very time for the UK to be working alongside other countries in a concerted way, rather than going it alone.”