Fears were raised in parliament last week over companies exploiting the Internet to avoid corporate tax, while accounting experts warned of a possible ‘black economy’ developing on the Web.
A spokesman for the Liberal Democrats, Lord Newby, said he feared companies would transfer key operations to Internet sites based in tax havens to legally reduce their tax bills – in line with the use of tax havens by banks and financial services companies.
Newby warned that the potential avoidance for corporation tax could be even greater than the loss of tax receipts from illegal evasion of VAT and excise duties.
‘The solution will require international agreement but there will still be a problem of companies operating from countries that are not parties to the agreement,’ he said.
The issue of international regulation for Internet taxation is a thorny one. Earlier this month, trade ministers, taxation officials and business experts met in Ottawa for an international conference aimed at forging consensus over Internet commerce. In response, the Inland Revenue said it will follow a ‘neutral’ tax policy for e-commerce, and added that it did not envisage major changes to the UK tax system.
Graeme Reid, tax partner at KPMG and an e-commerce specialist, said government restrictions on tax havens, such as control of foreign companies legislation – which force companies to register offshore profits in the UK – will help control Internet tax dodges. ‘The Revenue is not toothless over tax havens and I don’t see significant scope for tax avoidance. Most multinationals tend to play by the book,’ he said.
He added that the Treasury’s main danger area lay in the growth of electronic cash. ‘With TV Web access, people can download money from their bank and, when they buy from an Internet supplier, it disappears into a black economy.’
Malcolm Penney, an Ernst & Young tax partner who represented the Chartered Institute of Taxation at Ottawa, expressed concern that governments could become too heavy-handed in the application of tax to e-commerce.
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