Appropriate tax systems – taxation in the ‘Fourth Industrial Revolution’

Proposals for tax changes are now routinely given the names of companies that have been global disruptors. This naming practice recognises that the debate around an appropriate tax system revolves around how tax systems can catch up with the implications of the “Fourth Industrial Revolution”.

Retail

The retail sector is one of the sectors most affected to date by technological change. The statistics clearly indicate that the move from “bricks and mortar” to online shopping has been significant and Philip Hammond’s statement about an “Amazon tax” is just one more acknowledgement that the tax system has not kept up with changes to consumer habits. The idea of an “Amazon tax” is around making sure that the tax take reflects the location of the customer in the territory in which large values of sales are generated.

Our current tax system has developed over the last few decades and is designed for simpler transactions and a more local world than the one in which we operate today. While the increase in online retail has generally been blamed for the number of recent failures of big name high street retailers, many argue that our tax system has played a critical role in putting “bricks and mortar” retailers at a disadvantage compared with their online rivals.

There are a number of taxes that disproportionately affect UK “bricks and mortar” retailers. These include property taxes (business rates in particular but also Stamp Duty Land Tax) and corporation tax on profits. Changes to property taxes are matters for the UK to decide and, after much lobbying by the retail sector, further business rate reductions should go some way to helping UK retailers.

Corporate profits

There is a consensus, within the UK and internationally, that tax systems need to deal with today’s – and tomorrow’s – reality, which is currently not the case. How corporate profits should be taxed is part of an international debate which goes beyond the retail sector. A system where corporate profits are taxed based on territorial rules clearly gives an online or virtual retailer an opportunity to “shift” profits to a lower tax territory, thereby reducing even further the retailer’s challenging profit margin. This opportunity is not available to a retailer whose territorial location is demonstrably fixed to a particular high street. Internationally, the issue of profit shifting has been considered as part of the Base Erosion and Profit Shifting (BEPS) programme, and in the UK, the diverted profits tax has sought to address this unfairness.

The slow pace of internationally agreed change may mean the UK chooses to consider interim measures such as revenue-based taxes like the proposed “Amazon tax”. A revenue-based tax may seem like a good solution to tackle perceived tax avoidance by multinationals and the unfairness in the system, however, it would represent a radical shift from our current profits based tax system and could involve a wholesale rewrite of our tax rules. In practice, it may be difficult to define and measure what income should be taxed. It will also be important to protect start-up and growth businesses, on which much of our UK economic prosperity depends.

Add to this the issue of Brexit and the need for the UK to maintain good relations with our international trade partners to secure good trading arrangements in our post EU phase, and it is unlikely that the UK would want to be the first to pursue any significant unilateral changes in the short term.

Jane Mackay is head of tax at national audit, tax, advisory and risk firm, Crowe.