Recommendations & Conclusions
9 items
2
Recommendation
Forty-Fourth Report - The Digital Servi…
Accepted
HMRC implemented the Digital Services Tax with little cost, and the experience could provide valuable lessons for other new taxes. HMRC implemented the tax on schedule for only £6.3 million, less than budgeted, though there will be ongoing compliance costs. The small population of payers (18 in 2020–21) means that …
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HMRC implemented the Digital Services Tax with little cost, and the experience could provide valuable lessons for other new taxes. HMRC implemented the tax on schedule for only £6.3 million, less than budgeted, though there will be ongoing compliance costs. The small population of payers (18 in 2020–21) means that HMRC has been able to build a relationship with each taxpaying business. It is also learning more about the population of digital businesses generally. HM Treasury says that the tax is delivering fairer outcomes, but some companies face potential double- taxation for the same transactions – first by Digital Services Tax taxing the revenue, then Corporation Tax taxing the profit. Businesses who operate a model of a high volume of transactions with lower profit margins also bear a heavier burden. HMRC has provision for businesses to be exempted from payment if they can demonstrate that the activities in question are not profitable. Recommendation 2: HM Treasury and HMRC should consider what lessons can be learned from the Digital Services Tax’s introduction in terms of implementing tax systems efficiently and assessing the proportionality of its impact on taxpayers.
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Government response AI summary
The government agrees and says HMRC carries out an evaluation on the implementation of all measures that require new or updated systems and processes, and that they have since implemented other taxes learning lessons from the design and implementation of DST.
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HM Treasury
4
Recommendation
Forty-Fourth Report - The Digital Servi…
Accepted
HM Treasury and HMRC have a vital role in ensuring that the multilateral assurance framework for Pillar One of the OECD reforms will meet Parliament’s desire for accountability and transparency. The 140 jurisdictions involved in the development and implementation of the reforms will have very differing cultures around the transparency …
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HM Treasury and HMRC have a vital role in ensuring that the multilateral assurance framework for Pillar One of the OECD reforms will meet Parliament’s desire for accountability and transparency. The 140 jurisdictions involved in the development and implementation of the reforms will have very differing cultures around the transparency with which tax systems operate and the approach to tax compliance activity, and differing levels of commitment to the reforms. The OECD reforms will be administered and enforced through a multilateral administrative framework which will change tax administration for multinational businesses and determine the approach to compliance actions. Success will depend on cooperation between countries hosting users and those hosting the businesses. HM Treasury and HMRC have a vital role in ensuring that the framework meets their objectives and the expectations of Parliament around accountability and transparency, and that these are reflected in the international agreement and the compliance regime. Recommendation 4: HM Treasury and HMRC should: • alongside the Treasury Minute response to this report, write to the Committee setting out their objectives for the development of the multilateral administrative framework, including audit arrangements, • ensure they propose assurance arrangements that will provide the UK Parliament with sufficient accountability and transparency to provide assurance that the Pillar One and Pillar Two reforms are operating effectively, and • set out robust forecasts of expected revenues when details of the new regime are agreed.
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Government response AI summary
The government agrees and will write to the committee with the UK's objectives for the multilateral administrative framework, including audit arrangements and states that the forecasted revenues for Amount A will be published in the usual way after OBR scrutiny, at a future fiscal event.
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HM Treasury
11
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
It is unclear how the receipts from Pillar One will compare to the Digital Services Tax as HMRC has not yet modelled the likely receipts from businesses liable to pay Pillar One, prior to agreement being reached on how profits will move between countries.31 The Office of Budget Responsibility has …
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It is unclear how the receipts from Pillar One will compare to the Digital Services Tax as HMRC has not yet modelled the likely receipts from businesses liable to pay Pillar One, prior to agreement being reached on how profits will move between countries.31 The Office of Budget Responsibility has estimated revenues of over two billion pounds a year from Pillar Two by 2027–28.32 The Chartered Institute of Taxation has expressed scepticism about achieving this level of receipts, although HM Treasury stated that the estimate is not inconsistent with OECD projections.33 Progress in implementing the reforms
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Government response AI summary
The government agrees with the conclusion and commits to publishing forecasted Pillar One revenues at a future fiscal event after OBR scrutiny, while noting that Pillar Two revenue estimates were already published at Budget 2023.
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HM Treasury
13
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
Legislative decisions, implementation decisions and the operation of compliance regimes for Pillars One and Two will be carried out in line with agreed conventions. As previously stated, the OECD’s Pillar One is due to supersede the Digital Services Tax in 2024, and HM Treasury is keen for this to happen …
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Legislative decisions, implementation decisions and the operation of compliance regimes for Pillars One and Two will be carried out in line with agreed conventions. As previously stated, the OECD’s Pillar One is due to supersede the Digital Services Tax in 2024, and HM Treasury is keen for this to happen as quickly as possible.39 Pillar One would require new legislation, which would include the repeal of the Digital Services Tax.40 We asked what would happen if a multilateral consensus on implementation of the reforms was not achieved. The Departments explained that the legislation required a review of the Digital Services Tax in 2025, and there would be interest in what other countries were doing.41 What happens next would depend on whether the reforms were held up by a glitch or had fallen by the wayside completely, as the Digital Services Tax might not be sustainable in the long term.42
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Government response AI summary
The government agrees, committing to implement Pillar One and repeal DST, and details enhanced plans for DST compliance, including identifying non-cooperating groups and increasing awareness, to be completed in 2023 in case Pillar One is delayed.
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HM Treasury
14
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
The Chartered Institute of Taxation describes the Digital Services Tax as a ‘blunt instrument’.43 There are aspects of the tax’s design that are tolerable in the short-term but would need to be addressed if its life was to be extended appreciably: • The Digital Services Tax is a tax on …
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The Chartered Institute of Taxation describes the Digital Services Tax as a ‘blunt instrument’.43 There are aspects of the tax’s design that are tolerable in the short-term but would need to be addressed if its life was to be extended appreciably: • The Digital Services Tax is a tax on revenues. If the activities are profitable, the business may also pay corporation tax or corporate income tax on those activities in the country where those profits are taxed.44 HMRC does have provision for businesses to be exempted from payment if they can demonstrate that the activities in question are not profitable (called the alternative basis of charge).45 • The Expedia Group, one of the payers of the tax, pointed out to us in written evidence that for high-volume low-margin businesses such as themselves and other travel firms, a 2% tax on revenues effectively wipes out any profit.46
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Government response AI summary
The government agrees that HMRC has already completed an evaluation of DST implementation, applying lessons learned to other tax policy changes, and reiterates that DST is an interim solution whose impact is under constant review.
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HM Treasury
17
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
HMRC and HM Treasury said that they have not seen any evidence of tax avoidance so far, for example by changing business models, as businesses have not regarded it as worth their while. But they assured us that they are aware of the risks and that anomalies would be investigated.54 …
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HMRC and HM Treasury said that they have not seen any evidence of tax avoidance so far, for example by changing business models, as businesses have not regarded it as worth their while. But they assured us that they are aware of the risks and that anomalies would be investigated.54 Neither has HMRC found any evidence of tax evasion, which it told us is not unexpected given the profile of the major players in this type of business.55 Crypto assets are within scope for the Digital Services Tax. They are a rapidly developing area with little regulation. HMRC told us that it is one of the first tax authorities to produce comprehensive guidance on crypto assets and that the multilateral nature of Pillars One and Two will make compliance work on crypto transactions more straightforward.56
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Government response AI summary
The government agrees and is committed to implementing Pillar One while monitoring Digital Services Tax. HMRC is enhancing its plans to identify groups within DST scope, increase business awareness, and address risks from non-UK presence, with these plans due for completion by the end of …
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HM Treasury
18
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
As stated above, HMRC has not yet faced the situation where an overseas-based business refuses to pay the correct amount of tax as assessed by HMRC. HMRC told us that it has bilateral and multilateral agreements with other countries that would allow it to ask the tax authority in the …
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As stated above, HMRC has not yet faced the situation where an overseas-based business refuses to pay the correct amount of tax as assessed by HMRC. HMRC told us that it has bilateral and multilateral agreements with other countries that would allow it to ask the tax authority in the relevant country to assist in the collection of a tax debt. HMRC acknowledges that whether such cooperation would be forthcoming is debatable, given that the tax is a controversial one in some countries.57 Ensuring compliance with the OECD reforms
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Government response AI summary
The government agrees and reiterates its commitment to Pillar One implementation. HMRC's dedicated DST compliance team is enhancing plans to identify groups, increase awareness, and address non-cooperation risks, with these plans due for completion in 2023.
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HM Treasury
19
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
Pillar One will operate within a multilateral administrative framework, with the emphasis on international cooperation. This will be very different to how HMRC currently ensures compliance with its tax regime.58 Getting 140 tax jurisdictions to agree on a framework for administering the new system will be a key challenge, but …
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Pillar One will operate within a multilateral administrative framework, with the emphasis on international cooperation. This will be very different to how HMRC currently ensures compliance with its tax regime.58 Getting 140 tax jurisdictions to agree on a framework for administering the new system will be a key challenge, but it may be even more of a challenge for some jurisdictions to then operate the system as intended. HMRC and HM Treasury acknowledged that work will be needed to increase the capacity of some 50 Q 37 51 C&AG’s Report, figure 13 52 Qq 49–51 53 Qq 34, 56 54 Qq 65–68, 70–75 55 Q 69 56 Qq 38, 39 57 Qq 82, 84 58 Q 56 14 The Digital Services Tax jurisdictions, while pointing out that the cooperation of some jurisdictions (such as those where Pillar One payers are headquartered or those that will be required to reallocate tax receipts under Pillar One) will be more important than others.59
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Government response AI summary
The government agrees with the observation and commits to providing the committee with the UK's objectives for the multilateral administrative framework, including audit arrangements, by June 2023.
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HM Treasury
20
Conclusion
Forty-Fourth Report - The Digital Servi…
Accepted
There is a delicate line to tread between accountability, transparency and the maintenance of taxpayer confidentiality. The Digital Services Tax illustrates how difficult it is to talk about these issues in a way that protects confidentiality when you are dealing with a tax covering a small number of high-profile payers. …
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There is a delicate line to tread between accountability, transparency and the maintenance of taxpayer confidentiality. The Digital Services Tax illustrates how difficult it is to talk about these issues in a way that protects confidentiality when you are dealing with a tax covering a small number of high-profile payers. This will also be an issue with Pillar One.60 Nevertheless, the Departments told us that they are aware of the importance of other tax jurisdictions providing transparency to Parliament around calculations affecting UK receipts, including ensuring that the National Audit Office has the access it needs.61 59 Qq 18, 85, 86 60 Qq 76–80 61 Qq 87–89 The Digital Services Tax 15
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Government response AI summary
The government agrees, committing to normal Parliamentary scrutiny for Pillar One and Two, and to publish forecasted revenues for Pillar One (Amount A) at a future fiscal event, addressing the importance of transparency.
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HM Treasury