Revenue based UK tax on tech companies a step nearer?

The Government has indicated that a tax on revenues is potentially its preferred option for ensuring that digital companies pay a fair amount of tax on activities which leverage large user groups in the UK.


For the UK Government's updated position paper, see "HM Treasury's updated position paper on taxation of the digital economy".

The Financial Secretary to the Treasury, Mel Stride, has said that a tax on revenues was the "potentially preferred route to go” to ensure that large digital companies pay a "fair" amount of tax. The comments follow on from HM Treasury’s December 2017 position paper on taxing the digital economy which raised the possibility that the UK would introduce a revenue based tax on the digital sector.

The comments, which in many ways merely mirror those in the position paper, bring the UK into line with other Member States, such as France, Germany and Italy, which favour a revenue tax (or equalisation tax). Whilst the UK is committed to co-ordinated reform of the international tax rules, it has not ruled out unilateral measures in the absence of sufficient progress.


The tax treatment of the digital economy was specifically addressed by the Organisation for Economic Co-operation and Development (OECD) in Action Point 1 of its Base Erosion and Profit Shifting (BEPS) Project. In its final Report, the OECD essentially concluded that, because the digital economy is increasingly becoming the economy itself, it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes and the better approach was to analyse existing structures utilised by multinational companies and the key aspects of the digital economy that exacerbate tax challenges or BEPS concerns.

Nevertheless, there was broad agreement that the OECD and G20 countries should monitor developments to determine whether further work on the more directed measures should be carried out, recognising, in particular, that issues relating to tax nexus and tax treatment of data remained.

Since then, EU Finance Ministers have agreed to progress proposals to address the tax treatment of companies operating in the digital economy, see “Taxation of the digital economy”. Meanwhile, the OECD has released a “Request for input on work regarding the tax challenges of the digitalised economy” and the EU Commission has released a communication, “A Fair and Efficient Tax System in the European Union for the Digital Single Market”, seeking to influence developments in relation to the taxation of the digital economy and ensure that the EU acts in a co-ordinated manner.

Most recently, press reports suggest that the EU Commission is considering putting forward a proposal that the largest digital companies should be taxed at a rate between 1% and 5% on their revenues based on where their users are located rather than where they are headquartered. In the case of online advertisers, the tax should be levied “where the advertisement is displayed” and “where the users having supplied the data which is being sold are located.” For online shopping, the tax would be collected in countries “where the user paying for being able to access the platform (or to conclude a transaction within the platform) is located”. The draft proposal, expected to be made public in March 2018, apparently proposes that the tax should be applied to companies with worldwide revenues above €750m and with EU digital revenues of at least €10m a year. It is understood that the proposal will be put forward as a temporary measure that would be applied only until a permanent solution to fair taxation of the digital economy is agreed internationally.

UK position paper

Against this background, in December 2017 HM Treasury released for consultation a position paper entitled, “Corporate tax and the digital economy”, designed to inform the UK’s input into these ongoing international developments.

The position paper started from the premise that it is essential that the international corporate tax rules ensure that UK corporation tax payments from digital businesses are commensurate with the value they generate from the UK market and specifically the participation of UK users and, accordingly, that the government will push for reforms to the international tax framework to ensure that the value created by the participation of users in certain digital businesses is recognised in determining where those businesses' profits are subject to tax.

In particular, the paper explains how the traditional methods of recognising taxing rights (mainly through the existence of a permanent establishment) and apportioning tax between jurisdictions (through transfer pricing and profit attribution rules) fail to recognise value created by the existence of large local user groups in a jurisdiction. This is particularly the case in relation social media and online marketing activities (see the box below).

However, the paper recognises that whilst it is necessary to push for reforms at an international level, such reforms will not necessarily be straightforward to agree. Accordingly, the report also noted that, pending reform of the international framework, the Government will explore interim options to raise revenue from digital businesses that generate value from UK users, such as a tax on revenues that these businesses derive from the UK market. In addition, whilst the UK will work with other countries to consider how such a tax could be targeted, designed and co-ordinated to minimise business burdens and distortion, the paper stated that the Government would take unilateral action in the absence of sufficient progress on multilateral solutions.

While the UK stands ready to take unilateral action, the paper also recognised the value in co-ordinated implementation of such a tax between countries. This would minimise administrative burdens for businesses operating in different jurisdictions and reduce some of the challenges associated with the collection of tax and the calculation of businesses’ tax liabilities. Indeed, the paper noted that the Government’s preference is that even any interim solution should be actively considered in the OECD’s interim report

Interim options for reform: revenue tax

The December 2017 position paper noted that, of the options that have been put forward, the Government thinks the most attractive interim option would be a tax on the revenues that businesses generate from the provision of digital services to the UK market. It is, therefore, of no great surprise that the Financial Secretary to the Treasury has again noted that such a tax is “potentially the preferred route”.

Indeed, the introduction of domestic “equalisation taxes” by individual countries is one of the interim measures suggested in the OECD’s final report on Action 1. An equalisation tax is a tax on untaxed or insufficiently taxed income generated from all internet based business activities (both business-to-business (B2B) and business-to-consumer (B2C) activities) that is aimed at protecting a country’s tax base while a long-term strategy is developed at an international level.

However, as the position paper noted, there are a number of important design decisions in relation to any revenue tax that will need careful consideration:

  • Scope: The scope of such a tax should align with the specific concerns raised above about user participation not being given sufficient recognition by the international tax framework, which is particularly relevant to businesses that generate revenues through intermediation and the provision of online advertising.
  • Nexus: It would be important to consider what revenues the UK would have a right to tax given the possibility of users being located in a different country from consumers, for example, where a social media platform generates revenue from a non-UK business in relation to adverts targeted at UK users.
  • Rate: The rate would need to be set at a level that raises material revenue in a way that is nonetheless fair, non-distortive and applicable to business models with different profit margins.
  • Collection mechanism: There Government would need to weigh up the potential benefits to collecting the tax directly from the relevant companies, to ensure more efficient compliance and avoid placing new obligations on financial intermediaries, against use of a withholding model.
  • Detailed design: The design would need to address many detailed issues including, for example, double tax relief, de minimis thresholds and mitigating provisions for loss-making and early-stage businesses.

The date for comments on the position paper expired on 31 January 2018. Since that time, the Financial Secretary to the Treasury, Mel Stride, has said in an interview with the BBC that a tax on revenues was the "potentially preferred route to go” to ensure that large digital companies pay a "fair" amount of tax.


The UK Government is looking to the OECD to put forward “bold multilateral solutions” that build on the discussions taking place within the European Union, and help to ensure a more sustainable corporation tax framework for the future. However, that international progress will not necessarily be easy to achieve. In particular, the task may be made far more difficult should the USA, host to many of the largest companies likely to be affected, be unwilling to engage in the process.

In the meantime, some jurisdictions have already started to take unilateral action, with Italy in particular having already proposed the introduction of an equalisation tax on B2B digital transactions in 2018.

User generated value to online businesses

For many digital businesses that operate in markets through an online platform, the users of the platform (which may or may not be identical to a business’s consumers) play a more integral role in the pursuit of revenue and create material value for a business through their sustained engagement and active participation. For example, a social media platform that generates revenue through directing adverts at UK users who use a free online platform. The success of that business is reliant on the development of a large user base, on the engagement of users and on users’ contribution of content. It is also dependent on the collection of user data from intensive monitoring of that engagement and contribution, which can be sold to third parties or used to generate increased revenues through more precisely targeted adverts.

That participation, which is not under the control of the business, contributes to the creation of the brand, the generation of valuable data, and to the development of a critical mass of users which helps to establish market power and allows businesses to take advantage of the low marginal costs that are typically associated with running such a platform across multiple markets. It also explains why some of these businesses choose to, or are able to, provide innovative services to users for no charge.

This user-generated value is not captured under the existing international tax framework, which focuses exclusively on the physical activities of a business itself in determining where profits should be allocated for corporate tax purposes. This means that the businesses outlined above can generate significant value from a market like the UK without the profits they derive from that value being subject to UK corporation tax.

The position paper argues that this needs to be addressed. There is a need to consider the active participation of users, and the value that this participation creates, in determining how the taxable profits of certain digital businesses are allocated between countries for tax purposes - even where that business does not have a physical presence in a user jurisdiction.

There is also a case for reflecting on whether the activities associated with penetrating a market and sustaining a user base, which might be considered routine functions for many businesses, are more integral for certain types of digital platforms and should be given more weight in the allocation of profits between countries for tax purposes.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.