We now come to clauses 45 to 50. The last discussion was quite a long one, but hopefully it was helpful in framing the overall legislation within which we can now discuss the more specific elements, so we may not need to dwell as long on these parts.
Clauses 45 to 50 set out how the digital services tax charge will be calculated. The Government have sought to ensure that the DST is proportionate and charged only to those businesses that are best able to generate significant value from their users. As such, it will apply only to groups with annual global revenues from the named services of over £500 million. DST will be charged only on those revenues where they are attributable to UK users and only on amounts above £25 million.
Clauses 45 and 46 set out the thresholds and the allowance, and they set the rate of the charge at 2%. A DST tax rate of 2%, as we have discussed, ensures that digital businesses will make a fair and proportionate contribution to our public finances. Clause 46 also sets out how each member of a group should calculate their DST liability.
The Government recognise that some businesses have concerns about levying a tax on revenues rather than profits. That is why our strong preference is for a long-term profits-based global solution. That can be implemented only following an international agreement, however, so although the DST applies to revenues, the alternative basis of charge will reduce the charge for businesses with low profit margins or losses on their chargeable UK activity. Clauses 47 and 48 therefore set out the alternative basis of the DST charge and how DST liability should be calculated on that basis.
Online marketplace transactions will occur between two users, and those users may be based in different jurisdictions. Where one of those users is a UK user, revenues attributable to the transaction will be subject to the UK DST. Where the other relevant jurisdiction also levies a DST, however, there is a risk that the revenues could be taxed twice. Clause 49 sets out the relief for certain cross-border transactions, minimising that risk by ensuring that, in such cases, only 50% of the relevant revenues will be subject to the UK DST. Finally, clause 50 sets out when DST payments are due and payable.
Together, the clauses mean that the DST charge is proportionate while ensuring that digital businesses pay a UK tax that reflects the value they derive from UK users. Overall, as I have noted, the tax is expected to raise up to £2 billion over the next five years in a proportionate and responsible way.
As the Minister said, we have discussed at length the broader implications and the necessary measures set out in the clauses, but I have some technical issues relating to them.
On clause 46, the Institute of Chartered Accountants in England and Wales has said that,
“given the potential compliance burdens imposed by the DST, it is important to ensure that smaller digital businesses are not burdened by DST, so the inclusion of a £25m allowance looks reasonable but should be kept under review.”
On a similar but more general note, the Chartered Institute of Taxation has warned that some businesses will be undertaxed while others may be overtaxed. As we have said before, it is our position on the Opposition Benches that in these challenging times, those with the broadest shoulders should bear more of the load. Can the Minister confirm that he will keep the measure under review to ensure that companies, particularly smaller companies, do not pay more than their larger counterparts, to avoid the distortions that he talked about emerging all the time?
There are perhaps more substantial concerns around clauses 47 and 48 on the so-called safe harbour provision. As HMRC has stated, that is intended to ensure that the tax does not have a disproportionate effect on business sustainability in cases where a business has a lower operating margin from providing in-scope activities to UK users. Its inclusion is obviously well-intentioned, but some assurances will be welcome. It is clear that multinational companies are often adept at structuring their operations in a way that reduces their tax liabilities. Are there safeguards in place to ensure that the safe harbour provision is not used for such a purpose?
Clause 48, for instance, contains a list of excluded expenses that cannot be deducted from a company’s net profit, which goes on to form the basis of the alternative charge. The list, however, does not include royalties, and I am grateful to TaxWatch UK for drawing attention, through the research that it has done, to the implications that that might have, because royalties are at the heart of tax avoidance practices perpetrated by some digital tech companies. It describes how most of those companies’ profits are attributable to various types of intellectual property that they have developed.
By artificially locating the intermediate and ultimate legal ownership of the intellectual property in avoidance-facilitating jurisdictions and tax havens, those companies can avoid tax on UK royalties, and ultimately reduce their taxable profits in the UK. Why, therefore, are royalties not included on the list of excluded expenses? Surely the Minister would accept that that is a potential failure to adequately tackle the use of royalties to reduce tax liabilities, and might further incentivise the use of the safe harbour provision by larger tech companies, which will in turn be able to reduce their taxable profits through their practices with regard to royalties.
More broadly on the safe harbour provisions, the Institute of Chartered Accountants in England and Wales has also said that in spite of those, it is still concerned that low-margin businesses could face a very high rate of tax on UK-allocated profits. Will the Minister address those concerns?
On clause 49, the Chartered Institute of Taxation has highlighted that the interaction with other national tax regimes, including broadly similar but subtly different unilateral taxes in other countries, will still mean some double taxation, which the Minister talked about in our earlier debate. It describes this as a rough and ready way of reducing such instances by reducing the revenue chargeable by 50% if it arises from a transaction where a user in respect of a marketplace transaction is normally located in a country that operates a similar tax to the DST. Does the Minister agree with its assessment? What analysis has been done in that area? Has consideration been given to other possible approaches to reduce the risk of double taxation?
I thank the hon. Lady for her questions. She asks whether the £25 million threshold has the effect of clobbering small businesses. Our view is that the purpose and effect of the thresholds is to levy the tax on the businesses that are best able to afford it, and that to have a global revenue base of £500 million and revenue attributable to UK users above the £25 million threshold is in itself a basis that excludes a vast number of small start-ups—which might turn out to be wildly successful and effective unicorns. We do not believe that the threshold will inhibit growth. If this is a direction in which tax will be going over time, as I rather think it is and as colleagues have suggested, an awareness of how tax will bear on future revenues and profitability is in itself an important part of any business’s market development.
The hon. Lady raised a concern about the safe harbour alternative charge arrangements. That is designed to ensure that the DST is not punitive for businesses with low profit margins or losses, and I think that is appropriate. At the margin, there is a risk that some businesses might try to reconfigure their activities to qualify for that, but I think it will be relatively clear to the Revenue from self-assessment when a business that is intrinsically high-margin is disguising that or is, essentially, seeking to utilise the alternative charge unfairly. It is worth saying that the alternative calculation applies only to in-scope UK activity, so businesses will not be able to reduce profit margins by using out-of-scope or non-UK activity. That is an important safeguard.
The hon. Lady asked about royalties. The tax is designed to work based on the consolidated figures of groups as groups. The concern about royalty payments is that, typically, royalties are used within groups to move revenues around, so, from a gross standpoint, they tend not to fall within the scope of the revenue charge, and they should not. Of course, from a tax-principle perspective, there are perfectly legitimate royalty uses and payments that one would want to continue to allow in any case. The alternative charge takes into account only expenses in the consolidated accounts, and is not therefore principally touched by the concern about intra-group royalties, for the reasons that I have described.