Digital Services Tax in the UK

By Simon Gough

07-2020

In July 2019 the UK Government published its Finance Bill 2019-20, which included draft legislation for a 2% Digital Services Tax (DST) 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 applies from April 2020 and will raise a forecasted £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. This has become increasingly important in recent months as the Treasury seeks to recover some of their extensive spending on COVID-19 support packages.

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:

    o 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.

    o 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.

Looking forward, like other Member States with their own tax initiatives, the UK Government has committed itself to finding a solution at international level yet the UK DST does not include a specific ‘sunset clause’ that would automatically withdraw the legislation. Rather, the Government has given itself some flexibility by stating that it will dis-apply the DST ‘once an appropriate international solution is in place’ (however, this is not contained in the Bill so there is no specific legal obligation to this effect), and carry out a review before the end of 2025.

Now that the DST is in force, the UK is starting to face international (i.e. US) opposition, as seen after the USA threatened France with retaliatory action in 2019 if they move forward with plans for a tax of their own. The US backed down once the French announced a suspension to the collection of tax, pending the now delayed OECD international deal, until the end of 2020.

In March 2020, the UK stated that when negotiating a trade deal with the US it will consider the US's opposition to DST, however this did not materialise before the April 2020 implementation date. The US has subsequently opened a trade investigation ('Section 301' investigation) into a number of countries' DST plans, including the UK, Italy, Spain and the EU as a whole, citing that these new digital taxes 'unfairly target' American firms and are discriminatory. The US announced on 2 June 2020 that they are 'prepared to take all appropriate action to defend our businesses and workers against any such discrimination'. US officials warned the UK that DST could derail post-Brexit talks between the two nations.

The US has since escalated this further. In a letter to the Chancellor dated 12 June 2020, the US suspended talks with the OECD and a number of European countries, including the UK, whilst threatening retaliatory commensurate measures if these countries went ahead with their 'unilateral' digital service taxes. These talks had reached an 'impasse' according to Steven Mnuchin, the US Treasury secretary. Mr Mnuchin said that the US was unable to agree even on an interim basis, and would resume talks later on in the year to enable countries to focus on 'far more important matters', namely coronavirus, in the meantime as these discussions were a 'distraction'. On 17 June 2020, the UK Treasury said that it still intended to press ahead with DST.

On 25 June 2020, the Chancellor and his European counterparts responded to the US in a bid to defuse escalating trade tensions. They offered to limit the scope of the proposed tax, conceding in a reply to Mr Mnuchin that they 'would considerably ease the task of achieving a consensus-based solution and make a political agreement within reach this year'. This includes a 'phased approach', initially limiting the levy to 'automated digital service' companies, and therefore potentially excluding the likes of Amazon and eBay where physical goods are bought and sold.

However, despite Mr Sunak's concessions, on 1 July 2020 the DST was discussed during the Report Stage for the Finance Bill 2020 in the House of Commons and no changes were made to the draft legislation. The Finance Bill now proceeds to Royal Assent which is expected in mid-July.