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.
It is intended that the DST will apply from April 2020. It is projected to raise £275m in its first year rising to £370m thereafter, making it a relatively small contribution to the UK Treasury’s overall tax revenue. It is nevertheless an important consideration for companies whose activities fall in scope. The parameters for how the DST will work in practice follow:
• Tax liabilities will be calculated at group level but charged to individual entities in the group whose revenues involving UK users contribute to the tax thresholds, in proportion to their contribution.
• The thresholds mean that the DST will only apply 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 criteria for 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 will be available for in-scope companies who operate at low profit margins or losses. This allows such entities to use an alternative basis of charge in calculating their liabilities. This will effectively lead to a lower DST liability (or no liability if they are loss making).
• DST will be deductible as an expense of business, provided it is incurred wholly and exclusively for the purposes of a trade. However it will not be creditable against any UK corporation tax liability. This may result in double taxation.
Like other Member States with their own tax initiatives the UK Government has committed itself to finding a solution at international level, yet the proposal itself 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’ and carry out a review in 2025.
There are already factors which stand between the DST proposal and its coming into force. First, the UK will face international opposition: as noted below, the USA recently threatened France with retaliatory action if they moved forward with plans for a similar tax. . The USA is also putting pressure on the UK and the need to maintain close relations with the USA for trade purposes could leave the DST shelved. Second, domestic UK politics could come into play. Although the UK’s new Prime Minister Boris Johnson has previously supported a DST, uncertainty facing the UK economy over the UK’s withdrawal from the EU and a new Chancellor of the Exchequer may mean that the DST misses its April 2020 implementation date for political reasons.