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UK budget must strike balance between OECD goals and domestic tax agenda

The UK budget looks set to spell 'fiscal discipline' for taxpayers, but it could also define the British role in making the OECD’s digital tax reforms a reality.

Chancellor Rishi Sunak is set to declare “a new age of optimism” as part of the UK’s 2021 autumn budget. Sunak is expected to put forward a plan for ‘fiscal discipline’ as part of a post-pandemic strategy. Meanwhile, many key tax changes have already been set in motion, including the rise in corporate tax to 25% for 2023.

“Today’s Budget begins the work of preparing for a new economy post-Covid,” Sunak will say. “An economy of strong public services, vibrant communities and safer streets.”

However, the OECD statement around the UK’s endorsement of pillar one and pillar two have created a high-pressured environment for the UK Treasury. Any news regarding the UK digital services tax (DST) could spark scrutiny at an international level.

“The chancellor has an opportunity to explain what he wants to do with the economy going forward. Tax raises for companies have been announced in the last six months. We’ve got three things that we need to pay for: COVID-19, the green economy, and the whole area of levelling up,” said Laurence Field, partner at Crowe UK.

“I’m going to predict that we will say goodbye to the DST to align with what the OECD wants. We’ll see the end of that,” he added.

The OECD’s statement released in October reiterated the implementation of pillar one and its profit allocation rules. The world may be moving towards a formulaic taxation of multinational companies with sales over €50 billion ($58 billion) and profitability above 10% and away from the taxation of technology companies.

Once endorsed, the Multilateral Convention (MLC) will demand jurisdictions to abandon unilateral measures such as DSTs.

“One of the things that will be interesting to see is whether they are anything in the budget about what the benefits of pillar one and pillar two are in the UK. Are we going to make money out of it? Or is it going to cost us money compared to the DST?” said Field.

Over the years, a debate has been ongoing over whether adopting the pillar one approach would raise sufficient revenue as compared to the digital tax.

While the chancellor could mention it in the autumn budget, Field said it will likely be covered in the technical documents rather than the political speech. Either way, Sunak should mention the progress made by the UK as it involves jurisdictions from across the globe that have also agreed to the OECD’s two-pillar plan.

The need for global change

Businesses would benefit from further certainty around OECD advancements in the UK according to Field, as constant changes around tax raises and reliefs have hindered investment from corporations.

“What I hope for is that the government is going to set out some sort of vision and how does it expect the economy to look by the end of this decade. That would give businesses some confidence as they would know the direction of travel with government tax policy. It allows them to plan for the long term.”

Mike Hodges, partner and head of the private wealth team at Saffery Champness, doubted that the chancellor would give any more detail around DSTs as the agreement is on standstill.

“It’s always tempting to look at the successful companies at times like this where they were making enormous amounts of money and did very well during the pandemic. He’ll resist that for the time being because we have these massive global changes. I don’t think he would think it was right for him to do something unilaterally,” said Hodges.

“I’m more inclined to think he might encourage people to invest in businesses or invest in the UK,” he added.

Whatever the outcome, the Johnson government will have to be mindful of recent agreements made with significant players such as the US, particularly when discussing any online sales tax.

In March 2021, the chancellor mentioned the potential introduction of a two percent online sales tax to tackle the debate around online retailers not paying sufficient tax as compared to competitors on the high street.

However, the risk of consumer prices increasing has created scepticism, particularly with the rising threat of inflation following COVID-19. If the UK does decide to introduce the tax, however, it will need to ensure it aligns with OECD rules.

“In the design of the tax, the UK treasury will have done everything possible to make these online sales tax as different as possible from any DST,” said Giorgia Maffini, special advisor on tax policy and transfer pricing (TP) at PwC UK.

“Assume we see a consultation announced on the online sales tax, then we will have time to see how this new tax could align with pillar one. If they announced them right away, then we will have to assume they have checked with the relevant parties at the OECD,” she added.

The design features of the tax will need to comply with recent agreements with the OECD. The European Commission, for instance, delayed their initial proposal on the EU digital levy to push forward the global tax deal to the US Congress – something of which the chancellor will be mindful of, according to Maffini.

With COP26 underway, the OECD’s two-pillar proposal still being negotiated, and disrupted economies post-COVID, Sunak’s budget lands in a high-pressured and difficult environment, in which each announcement could be disruptive. This budget has to take into account this delicate state of affairs.

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