Digital Services Tax in the UK

By Simon Gough

10-2021

The OECD's two-pillar plan to reform international corporate tax announced on 1 July 2021 will see the withdrawal of the UK's Digital Services Tax ("DST") of 2% on the revenues of search engines, social media platforms and online marketplaces (financial and payment services are exempt) irrespective of how they monetise their platforms.

DST: Key features

DST was introduced retrospectively by the Finance Act 2020 as a temporary measure to address the challenges posed by the digital economy to international corporate taxation.

Effective from 1 April 2020, DST is forecasted to raise £275m in its first year, with collection starting in 2021, rising to £370m thereafter, making it a relatively small contribution to the UK Treasury’s overall tax revenue but nevertheless an important consideration for companies whose activities fall in scope.

The parameters for how the DST works in practice include that:

  • Tax liabilities are calculated at group level but are charged to individual entities in the group whose revenues involve UK users. These entities contribute to the tax thresholds in proportion to their contribution.
  • The thresholds mean that DST only applies to groups with global revenues over £500m and UK revenues over £25m, which includes an allowance so that a group’s first £25m of revenues derived from UK users will not be subject to the DST.
  • There are different considerations of what constitutes participation by a UK user depending on the activity in question:
    • Online marketplace transactions will be considered to involve UK users if at least one of the parties is UK based, however the tax revenue charged will be reduced by 50% if the other user is located in a country with a similar tax to the DST.
    • Advertising revenues will be considered to have derived from UK users when the advert is intended for UK audiences.
  • A ‘safe harbour’ principle is available for in-scope companies who operate low profit margins or losses, allowing such entities to use an alternative basis of charge to calculate their liabilities and effectively lead to a lower DST liability, or no liability if they are loss making.
  • DST is deductible as an expense of business, provided it is incurred wholly and exclusively for the purposes of a trade. However, it is not creditable against any UK corporation tax liability. This may result in double taxation.

Towards the withdrawal of DST

The UK has faced significant international (i.e. US) opposition to DST. The US has previously argued that digital services taxes "unfairly target" American firms and are discriminatory. The US threatened retaliatory commensurate measures if the UK and other European countries went ahead with their "unilateral" digital services taxes and vowed that it was "prepared to take all appropriate action to defend our businesses and workers against any such discrimination".

The inauguration of the Biden administration in January 2021 helped to restart the previously stalled OECD negotiations on the international tax challenges posed by global digital businesses. On 1 July 2021, the OECD issued a statement setting out its two-pillar plan to reform international corporate taxation (Digital Services Tax page), which the UK has committed to. Pillar one will enable the UK to tax a portion of the profits of the world's largest businesses that are attributable to consumption in the UK, including the profits of the world's largest digital businesses. As a compromise, the UK is to withdraw DST and commit to a 15% minimum level of global tax on large businesses under pillar two of the OECD's proposal. Whilst there is still work to be done, the OECD is planning to finalise a detailed implementation plan by October 2021 and implement a legislative framework during 2022. The proposal is intended to take effect from 2023.