The digital services tax was designed as an interim tax before the reforms to international tax rules to ensure that multinational enterprises pay a fair share of tax wherever they operate, said the House of Commons’ Public Accounts Committee (PAC).

However, given the likely delay to the first stage of these reforms – pillar one – the digital services tax is likely to have a longer life than intended. The committee was concerned that this may prompt businesses within the scope of the tax to consider using the resources and expertise at their disposal to circumvent it. It said HMRC will need to be ready for that scenario, with robust measures to ensure compliance in the longer-term if needed.

Sarah Olney, who led the inquiry, said: ‘We were very pleased to see HMRC finally getting to grips with the realities of taxing multinational corporations, after years of PAC recommendations on this. But the Revenue needs to up its game on compliance – especially across jurisdictions – about how the tax will actually operate, over what will likely be years more before a proper international tax is fully operational.’

Praising the committee’s report for shining a light on the DST, John Cullinane, CIOT’s director of public policy, said: ‘By some measures the tax has been a success – as the PAC points out it raised 30% more than expected in its first year. However, the fact that the tax still exists – and has no immediate prospect of repeal – represents a failure.’

He said there seemed little sign of a breakthrough in the talks on allocation of taxation rights that all major trading partners could sign up to, which would enable the UK DST and its equivalents elsewhere to be scrapped. In light of this there was a ‘real risk that the tax could become effectively permanent’.

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