Hello, I am Barry Murphy, a partner at PwC, and welcome to the third episode of our Talking Tax Podcast.
A series where we discuss the big and thorny tax issues creating the headlines today, bringing together views from PwC and beyond. Today, we are looking at the noise around how you tax digital business. Headlines are bound by, whether enough tax is raised from big digital business in particular. Yet, surely the growth of online business is a boom for the economy; generating profits, wages, wealth that are taxed. It’s certainly a big focus of the Governments new industrial strategy, investment in digital education, digital infrastructure, bigger tax credit research, for research and development, but what’s the tax issue then? If not enough is being collected, is the problem with the rules themselves, are people trying to get around and circumvent the rules, is the situation going to get any worse, before it gets better, where do we go from here?
Well, I am delighted that I am joined by two experts with the answers to some of these questions today. Firstly, Roxanne Morrison, who is the Senior Policy Advisor on Digital, to the Confederation of British Industry, the CBI; and Alenka Turnsek, a Tax Partner at PwC, who specialises in Digital Business.
So, Roxanne, maybe, if we start with you. I mentioned earlier, surely digital, it’s great for the economy, we should be doing more of it. It should be raising more tax revenues. What’s your view on the CBI view?
Well, thanks very much for having me here today.
I think I can give an unequivocal yes that digital is good for the economy, not only is it good for international competitiveness, but it’s absolutely essential for the UK’s global standing in the world. I think, the first thing to know on the whole issue of digital, is there is not really a distinct digital sector anymore.
Every sector, to a certain extent, is digital and that really changes, sort of, the conversation around these issues. I think, firstly and almost foremost is that, businesses recognise that digital is a crucial driver of growth. So, 94% of businesses recognise that digital technologies drive productivity. On the other side of the equation, we know that digital can open up cross border opportunities, just through the click of a mouse, and the UK rightly tops the charts when it comes to things like e-commerce.
And, then you have the other big issue of the perennial productivity puzzle, and certainly businesses and Government really recognise that if we are going to solve that conundrum, digital is going to be a fundamental answer to that, and I think there is a really great quote from Matthew Hancock, who is the digital minister. I mean, he said that, “the pace of change is accelerating. The way that digital is going to change in the future, is going to get faster. So, actually, the moment that we are living in right now, is the slowest that will ever be.”
I think, it’s because that pace of digital change is accelerating, that this whole issue of tax is becoming even more prominent, and it’s no surprise that a lot of countries are looking at how we actually address this issue in the context of, sort of, increasing digitisation.
The focus that we have seen has predominantly been on corporation tax and how you tax corporate profits.
CBI, you know, we represent small, medium and large businesses. There is a complete recognition that we do need to engage in this international review of tax rules. We’ve been incredibly active in the OECD talks on this, and I think, the main message from businesses so far, is that reforms have to be coordinated. I think, there is a challenge in this conversation that some countries want to take unilateral action and, sort of, you know, breakout on their own.
But given that the pace of change is accelerating so quickly, if reforms traditional tax are going to work, they are going to have to be coordinated.
Okay, so, I am hearing there that every business is digital business these days almost. We’ve got accelerating pace of change, certainly taxes are high on the agenda for the CBI, and you are getting involved in the right discussions, and you want to see coordination. So, that’s quite a big Christmas list, so it is I think in terms of tax, which might bring down to you Alenka, on that piece about the current roles. We’ve heard that business is interested, wants to engage, but what is the issue, what’s the real issue we have at the moment, with taxing digital business?
So, the current rules for taxation of businesses is based on having a physical presence in a jurisdiction to have a taxable presence at all, and then it requires trading within a jurisdiction. Now, digital businesses, in most cases don’t require physical presence in a country. One can interact with, for example, UK user base through a non-UK platform, and interact and transact directly, and rules just simply do not trigger the thresholds for those kind of companies. So, that’s resulting in a reduced corporate tax stake for the Governments.
To compile the problem for the Governments, Digital also is displacing the employees and replacing with machines, and that essentially means there is also a hit for the employment and personal tax stake.
So, looking at the two, the Governments are currently trying to solve both issues at the same time through changing legislation.
Okay, and on that piece around the corporate tax in particular, why is that the one that’s generating all of the headlines, and what’s being done at the moment in terms of trying to fix that?
So, the corporation tax, if you look at it, for every industry, we have worked out what drives the value. We understand the value chain, we understand the businesses. We have set the rules on what basis we allocate profits to different activities across multinational, across the borders. But, when you look at the digital, it’s resulting in convergence in different industry.
So, we’ve lost that industry benchmarks. We are also the drivers that create value in digital economy and their difference. So, user base does not exist in traditional businesses. Well simply, there isn’t a wealth of knowledge and a historical experience, on how value would be allocated to the new value drivers.
So, is that almost saying, if I have a very sophisticated tech driven company in one country, but my user in the UK can download something and pay for it, that mechanism just may not be there to tax me today, because somebody is saying that value is elsewhere. Is that where we are at?
Yes, what we are saying is that the currently understood framework for traditional business that cannot be translated directly under the digital businesses, there are gaps, and that’s where there is a perception that digital businesses don’t pay enough tax, but it simply is that the rules do not quite apply in the same way to digital businesses, because they do not have the same triggers.
So, how would you respond when some people say actually these businesses are playing, kind of, hard and fast to those rules? They could do more, they could solve this problem in sales, and they are some of the headlines we see. Would you agree with that, or is it just that they have to accept what the rules are today, and can’t do anything about it?
Well, there is a perception that the rules will not be fully applied, but it is also true that the rules were written for traditional businesses, not for digital businesses. So, there is a gap, and the Government is trying to address that gap by introducing some bridging legislation or anti-avoidance legislation; and at the same time, I think, there is an understanding that just tinkering with the current rules will not solve the problem.
Digital is a fundamental shift, as being said, this is the slowest it has ever been. So, we are going to see the change in what we are doing, the pace of the business, and what the business is actually doing. The Governments are realising that on some level, hence they are introducing short-term measures to tax digital, which is somewhat more punitive measures, and they are not necessarily supporting the growth and prosperity of digital economy.
But at the same time, I think, there is an understanding that the rules will have to be fundamentally reformed to be fit for purpose and applicable for digital economy, and that is happening in parallel, but it will take longer.
Okay, so, some knee jerk reaction to try and plug perceived gaps. You mentioned earlier Roxanne, about, it’s on your agenda to engage, but what’s the view of your members in terms of this perception of digital tax avoidance if you like, and does that differ between small business and large business?
No, I think, the issue of tax is something that our members are incredibly, sort of, concerned and recognise as something that they need to be talking transparently about. I think that in terms of the issue of tax, it’s something that’s written up the board agenda in recent times. I think, if you compared how companies talked about it 5 years ago, to how they talk about it now; tax used to be one of those subject that was very difficult to engage with in terms of how the public saw it.
We’ve definitely seen a change. The companies now understand the need to talk about tax in an accessible way and something that the general public can understand. I mean, certainly, that the work that the CBI has been doing through our campaign called “Everyone’s Business,” is to really get companies to talk about tax in a way that, in terms of the policies that they have to be able to explain, why they pay the tax that they do, how they do it, and sort of, what the contribution that that is to society.
I think it is important to recognise, you know, you make the distinction between large businesses and small businesses, but when it comes to the tax gap, one of the most fascinating stat is that, small and medium sized businesses actually have a larger tax gap than large businesses.
So, in terms of the policy outlook towards this, and Government definitely recognises this, we need to focus on making sure that we are taxing growing businesses in the right way, the same that we have the focus and attention on taxing multinationals. I think it’s important that we don’t fall into the trap of trying to play these businesses off each other, because in terms of the general UK economy, you know, both sides of the same coin, and it is going to be really important going forward to get the policy solutions to both types.
Okay, so, difficult issues, but it sounds like everybody has a vested interest in engaging with this right now, be it, public, small business, big business, tax authorities to get it right, because what I am hearing is, if we don’t do that, the money is not going to be there to pay for the public infrastructure and services we need to underpin the industrial strategy the Government has come out with.
So, I think, that’s the grown up way to me of looking at it, rather than one person is doing right or wrong, but how do we go forward from here.
So, we’ve talked a little bit about OECD and what they are doing, but Alenka, turning to you, maybe first as the tax expert, what are your measures for, what do we need to do move forward?
Yes, there just need to be engagement in terms of understanding what is the right way to define the nexus or taxable presence in jurisdictions, which will look very different in a digital economy. There does need to be an understanding and consensus among how the value ought to be allocated between different value drivers in the digital economy.
When you say allocated, allocated between different countries, and is that a real thorny issue?
Well, I think, you will probably need to start understanding what’s the value chain and what different operating models we even have, and what it drives behind them, and some of them, and how does those combine in the value chain of the business, and how do you attribute the value. If they happen to be in different jurisdiction, yes you have cross-border issues. If they happen to be in the same jurisdiction, then it’s less controversial from trespassing perspective.
So, those would be some of the initial things that we do need to address.
Are we seeing that there is regional consensus around the world on this problem? So, you and Roxanne can outline. Hey, everyone is looking at this sensibly, but if I go to the US, to China, to Latin America, to Africa, is everyone looking at this the same way, if we are talking about cross-border business?
So, to an extent, there has always been, sort of, regional differences, the way that’s corporate is being taxed. Say in Europe and in the US, the preference has always been to tax in the operating profits basis through a corporation tax. If you look at Asia and Latin America, the preference has been through indirect taxes.
So, and what we, kind of, are seeing now, is all more universally, for short-term measures, the focus has been on more indirect-type measures, although they do fall within the corporate tax regimes. But, in the long term, I think, there is an understanding emerging that we will have to revise, and this probably will transform, the corporation tax principle.
So, is the solution region by region? I don’t really think will benefit the business. In fact, it probably might stifle business and raise international trade barriers in some shape or form.
Okay, so real risk is, without their consensus we will stay in this logjam for quite some time to come, I think is the danger. So, engagement is key.
Roxanne, in terms of that engagement, you said, you are leading on behalf of some British business and getting them engaged with OECD and other bodies, where does this feature? Does it feature a long way down the priority list compared to Brexit issues, or what’s happening?
So, I think, the UK has a real strength in the sense that we are a leading digital nation. UK consumers top the list when it comes to, sort of, use of technology in this country. So, I think, in terms of this whole debate on taxation, the UK is in a really strong place to lead the conversation of this. But, the point that I mentioned earlier, there is no point on the UK breaking alone, because the only solution to this problem is going to be through, sort of, global coordinated reform. So, in that extent, the UK has an incredibly important role to play, but we need to get everyone on to the same page as us.
I think, in terms of Brexit, I mean, it’s always a bit difficult to know where to start with that, but in terms of the digital issues within Brexit, they are taking central stage in the negotiations. So, whether it’s the customs union, whether its access to talent, those are huge, really important digital issues, which are, you know, they are always in the headlines. The one that certainly we spend a lot of time talking to members about, which definitely links tax, is this whole issue of data, and the fact that data underpins over 240 billion pounds of economic activity in the UK. The reason for that is, there is not one digital sector, it’s pretty much all sectors have some form of digitisation now.
So, if you think of bread and breakfast in Leicester, if they want to get a customer from France, and they have got to process that email address, they have got to process the financial details. If we leave the EU without a deal on data, we are putting that frictionless relationship at risk. So, that’s certainly a lot of work that we have been doing on this.
I think, it’s just quickly worth mentioning, you know, technology is going to play a massive part in this discussion going forward on tax. If you think of something like blockchain, I am already having conversations with Government on how that’s going to change the customs union; how that’s going to change, how they collect tax; how that’s going to change, how they engage with stake holders.
So, I think, there are huge opportunities going forward for technology to solve some of the issues that we are talking about.
It’s almost a brilliant case study there to a Leicester-based guesthouse, getting customers from France, you pay in bitcoin maybe, and you pay a tax automatically, nirvana of the future.
Alenka, Roxanne, thank you for that discussion. I think it certainly opened my eyes to some of the issues, I hope it did for you as well, listening to this podcast.
Do join us for our next one, and listen in to the previous episodes, and let us know your comments on what you’ve heard, and thoughts for what you would like to hear in future episodes as well.
Thank you very much.