UNITED KINGDOM - UK Digital Services Tax to go ahead
Following a consultation process, the UK government has committed to pressing on with the introduction of the Digital Services Tax (DST). This is despite an increased likelihood of a long-term multilateral solution by the OECD and concerns raised by the US Government in respect of similar proposals in France. Draft DST legislation was published on 11 July 2019 for consultation, with the intention that the UK DST will apply from 1 April 2020. The Government will review its position in 2025.
What are the latest DST developments?
Some important changes to the Government approach have emerged since the Government’s consultation in November 2018. These include:
- A partial relief from the DST where one of the users is located in a country which also has a DST that applies to marketplace transactions. For online marketplaces, where one of the parties is a UK user, all of the revenues will be treated as derived from UK users. However, in determining the charge to DST, the revenue can be reduced to 50% when the counter-party is located in a country that operates a similar tax. Taxpayers are required to make a specific claim for this reduction in their DST returns.
- An intention to make the DST reportable and payable on an annual basis, rather than in quarterly instalment payments as was previously proposed.
- An exemption from the online marketplace definition for financial and payment services providers.
- Confirmation that the Government will be moving forward with its previously stated preference to use a UK profit margin in the safe harbour calculation. This will be of value to those businesses where the relevant digital services activity has a very low (typically 2.5% or lower) UK operating margin. In case of a negative margin, there will be no DST liability.
- Revisions to certain administrative provisions. The DST will now be calculated and reported at the group level, and the group will be able to nominate a company to undertake the reporting on behalf of the rest of the group. Where no nomination is made, the ultimate parent of the group will be responsible. The DST liability and expense will remain with the entities that generate the underlying revenues subject to DST for expense deductibility purposes.
What are the key criteria, thresholds, rate, scope and applicable date?
The DST is a new 2% tax on the revenues of large businesses providing internet search engines, social media platforms and online marketplaces to UK users. It applies to businesses generating worldwide in-scope revenues of more than GBP 500m, with at least GBP 25m of these revenues being derived from UK users. However, a group’s first GBP 25m of revenues derived from UK users will not be subject to UK DST.
The DST is intended as a temporary ‘stop-gap’, pending work being led by the OECD to find a long-term multilateral solution to the taxation of the modern, digitised economy.
The basis of charge is on UK digital services revenues that arise in connection with digital services activities of any member of the group.
Digital services activity
This means the provision of a social media platform, internet search engine or an online marketplace. Legislation outlines the conditions that define two of the three activities, but does not define an internet search engine. The provision of digital service activities by a group includes;
- The carrying on of any associated online advertising business
- Being a business operated on an online platform that facilitates the placing of online advertising and derives significant benefit from its connection with the social media platform, search engine or online marketplace.
However, there is an exemption from the online marketplace definition for financial and payment services providers. As expected, the sale of own goods, the provision of online content and the provision of radio and television broadcasting services have been excluded from the scope of DST.
UK digital services revenues
These are revenues that are attributable to UK users (someone who is normally in the UK or is established in the UK). They include advertising targeted at a UK user or where a UK user is party to a transaction taking place on an online marketplace.
In the case of businesses with mixed revenues, ie that are attributable to both the digital services activity and to another activity, draft legislation allows for an apportionment on a just and reasonable basis. It is expected that businesses will need to establish new processes and accounting systems to help them collect and monitor the data required to comply with the rules.
While the UK government still believes that the long-term solution to the tax challenges arising from digitalisation lies in reforming the international tax rules, it considers that unilateral measures such as the DST are justified in the short term.
The DST will increase the administrative and compliance burden on affected taxpayers, and some of the inherent challenges of a revenue-based tax remain, including the risk of double taxation.
These design challenges have led to concern amongst many in the international community regarding the proliferation of unilateral DSTs. The US, for example, has been vocal against the implementation of DSTs in Europe: it has begun an investigation into the French government’s introduction of a similar measure: a move that could ultimately see the imposition of tariffs.
The US may take a similar view of the UK DST, given the UK is a key market for US tech giants. The potential impact on UK-US trade negotiations in a post-Brexit environment remains to be seen.
It also remains to be seen whether the UK moving forward with its DST will encourage other governments that have been actively considering similar proposals including Austria, Italy, Spain, and Mexico, to move forward with similar taxes. If they do, this will add further complexity to an increasingly complex environment.
There is also likely to be a trickle-down effect of the tax burden, resulting in an increased cost of doing business for users of the platforms of the large digital business that are in scope. For example, Amazon has announced that it will pass the cost of the French equivalent tax on to users of its platform. We expect the same will happen in the UK across all businesses on whom the tax is charged (particularly B2B).
International businesses should continue to monitor developments in relation to the taxation of the digital economy closely.