27 July 2020
On 1 April 2020, the UK’s new Digital Services Tax (DST) came into effect. Announced in the 2018 Budget and legislated for in Finance Bill 2020, this tax is intended to address the misalignment between the place where profits are taxed and the place where value is created.
The name gives it away – the tax is aimed at large businesses which operate in the digital economy providing social media services, a search engine or an online marketplace. These are areas where value is measured through interaction and engagement.
The value of these interactions and engagements is currently not accounted for when allocating the profits of business between countries. The DST is expected to ensure that large multinational businesses that are within the rules contribute to public services with a 2% tax on revenue.
According to the latest government guidance:
“The government still believes the most sustainable long-term solution to the tax challenges arising from digitalisation is reform of the international corporate tax rules and strongly supports G7, G20 and OECD discussions on long-term reform. The government is committed to dis-applying the Digital Services Tax once an appropriate international solution is in place.”
What is ‘appropriate’ and how soon they can expect to achieve this is anyone’s guess.
However, HMRC has said the DST could result in as much as £515m in additional annual income for the Treasury by the end of the 2025 financial year, so it is unlikely to be dis-applied anytime soon.
So how does it work?
The tax applies to large businesses providing social media, search engine or online marketplace services. If such a business turns over more than £500m globally and more than £25m in the UK through these services, its UK-derived revenues will be subject to a 2% tax. There is an initial £25m allowance so that anything below and up to £25m from UK users will not be subjected to DST.
Also included is any associated online advertising service, ie. one that facilitates online advertising and benefits the social media service, search engine or online marketplace.
However, there is an exemption for financial services providers under the online marketplace definition. If a user is based in a country that uses a similar tax to DST, the charge will be reduced to 50% of revenue from the transaction.
All we know so far is that the DST will be payable and reportable on an annual basis. HMRC have yet to provide the detail on how they will achieve this, but my guess is a digital system similar to the one introduced a few years ago to deal with the Annual Tax on Enveloped Dwellings (ATED).
Even though the DST theoretically applies to UK and foreign businesses alike, the turnover thresholds are in practice likely to be met only by a small number of multinational companies. Those companies, including Google, Amazon and Facebook, are overwhelmingly concentrated in the US.
The US government has repeatedly protested against the UK’s decision to introduce the DST. It asserts that it is unfair and discriminatory, and has made threats of retaliation against the UK should it go ahead, such as introducing arbitrary taxes on British car companies.
Although the US administration, no doubt distracted by the coronavirus crisis, has not repeated these threats recently, it seems likely that it will eventually make its displeasure known. So watch this space…