Ahead of the UK Budget this month, the Chartered Institute of Taxation (CIOT) has urged caution from the Chancellor on his suggestion to go it alone with a temporary new sales tax on digital multinational companies.

Recently the institute has responded to the government’s corporate tax and the digital economy position paper and held fringe meetings at party conferences on digital taxation, and is now highlighting the risks from “interim” taxes on the revenues of digital companies.

The CIOT position is that maintaining the existing principles of international tax is the most effective way to tax global profits, particularly the principle that a multinational group’s profits should be taxed in the countries in which it undertakes its value-generating activities, rather than where it makes sales.

However, the institute acknowledged that the current system cannot accurately capture the wealth created by users of a digital platform where such users are crucial to the business model of the platform operator, and noted that this requires a long-term sustainable solution.

Commenting, CIOT technical committee chair Glyn Fullelove said: “Work towards a multilateral solution continues, and this is likely to take at least another year or two. We acknowledge that the lack of such a long term solution today creates pressures for interim measures.

“However, in our view, the risks associated with an interim tax on revenues outweigh the potential benefits and could be counter-productive to further discussions on a long term model. We would prefer that the UK refrains from introducing interim revenue taxes, particularly given the OECD has committed to reaching a global, long-term solution within the next couple of years.”

The CIOT highlighted the potential risks as; other countries may wish to tax a wider range of services; the tax could potentially be passed on to customers; it could prove difficult to apply, leading to disputes; and a single rate applied to revenues is likely to be a “blunt instrument”.

“It is a characteristic of the development of new digital business models that they have led to quasi-monopolies in a number of sectors. Monopolies distort all forms of economic activity, including taxation. Adjusting taxation is not necessarily the best way – and certainly not the only way - to tackle unfairness arising from monopoly. We would caution against introducing an unsatisfactory tax in an understandable attempt to meet the concerns of politicians and the public at large,” Fullelove concluded.

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