Global menu

Our global pages


Autumn Budget 2017: Taxing the Digital Economy

Autumn Budget 2017: Taxing the Digital Economy
  • United Kingdom
  • Tax planning and consultancy - Budget


The Chancellor has announced that the Government plans to introduce a withholding tax on IP royalties paid to low-tax countries where such royalties are connected to UK sales. This withholding tax is intended to have extra-territorial application.

This tax is proposed as the first step in a number of wider changes to the UK and international tax systems to better tax the digital economy. It is widely recognised that traditional tax systems, with a focus on physical presence, do not effectively tax the digital economy. Governments and tax authorities have been concerned that the profits generated from digital sales in their jurisdiction are not properly taxed and that multinational digital businesses do not pay their “fair share” of taxation.

These issues have been one of the key areas of focus of the ongoing OECD BEPS project seeking to reform the international tax system. However, the OECD’s work in relation to the digital economy has made limited progress to date, with no clear proposals for tax reform targeting the digital economy. However, new life is being breathed into this area, with a refreshed focus by the OECD, separate proposals from the EU, and unilateral proposals by countries such as Japan, France, Austria, and India.

The UK Government has now set out its stall on tax and the digital economy through a position paper issued as part of the Budget. While this paper supports a broad international approach to this issue, it acknowledges that international reform will be slow and, in the interim, unilateral measures may be required.

In this regard, the new royalty withholding tax is proposed as an immediate action. IP ownership through low tax jurisdictions coupled with royalty payments taking profit out of higher tax jurisdictions have been a feature of the digital economy and it is these arrangements that the new tax is proposed to target. As described in the position paper, it is proposed that the tax would apply to the following arrangements:

  • Digital Co. A, resident in low-tax country Y with which the UK doesn’t have a double tax agreement, owns the group’s intellectual property rights to sell digital software to customers. It licences those rights to Digital Co. B.
  • Digital Co. B resident in country X then sells digital services to UK customers, and in return pays a royalty to Digital Co A in proportion to those sales. Digital Co. A is not subject to tax on that royalty income.
  • Digital Co. B has no UK taxable presence. Under existing rules, the UK would not therefore impose a withholding tax on the royalty payment it makes to Digital Co. A.
  • The new rules would impose a UK withholding tax charge on the royalty payment from Digital Co. B to Digital Co. A.

Beyond the above, there is limited detail on what the proposed tax entails at this stage. A consultation document on this tax will be issued on 1 December 2017 with further information. It will be key to understand the territorial scope of these new rules, as well as the computation and collection mechanics.

Please view our dedicated Autumn Budget 2017 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

Subscribe to get tax legal updates and briefings

Subscribe to get tax legal updates and briefings