Storm in the Cloud: A Study on the Macroeconomic Impact of the UK’s Digital Service Tax

Abstract

The nature of the digital economy puts pressure on traditional tax practices, as it is frequently characterised by high returns from intangibles. In this paper, we assess the macroeconomic impact of the digital services tax introduced in the UK in 2020. We employ the CORTAX model, which is a macroeconomic model elaborated for the Member States of the European Union, the UK, the US, and Japan. The model strongly focuses on corporate taxation and multinational firms. To be able to represent the digital sector, a major extension of the model has been introduced to expand the model from one sector to two, allowing the digital sector to be modelled separately from the rest of the productive economy. The results suggest a negative impact on GDP from the introduction of the tax but a gain in welfare and consumption for the UK and small positive spillovers for close trading partners.

KEYWORDS:

• Digital economy
• Corporate taxation
• Fiscal policy
• Open economy macroeconomics
• General equilibrium modelling

JEL codes.:

• E62, H25, F41, D58

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In the model, all equations are in per capita terms using labour supply from the baseline.

2 CFC rules are a set of filters that apply to the non-exempt profits generated by a non-resident firm in UK in order to determine if these profits should be taxed.

3 Leisure is defined as one less the share of hours worked per day.

4 The size of the initial FDI can be found in Álvarez-Martínez et al., 2016.

5 The common agreement on Pillar Two recently reached by the OECD is a positive step forward on this direction. https://www.oecd.org/tax/beps/