Digital Services Tax in the UK

By Simon Gough

06-2020

For several years there have been efforts at international, EU and national levels to reform taxation to ensure that profits are taxed where economic value is created. Most recently this work has centred on and shifted further towards the digital economy, but it has its roots in the scrutiny of tax planning strategies used by multinationals that operate across multiple jurisdictions.

At an international level, work has revolved around the Organisation for Economic Co-operation and Development (OECD) which in 2013 launched its Base Erosion and Profit Shifting (BEPS) Action Plan with a process aimed at countering certain strategies used by multinationals to reduce their tax burden. On 9th October 2019 the OECD published its 'unified approach' for public consultation, with the aim of arriving at a consensus, so as to develop a solution for its final report to the G20 in November 2020 in Saudi Arabia.

At EU level, the European Commission has also been trying to address the tax strategies of multinationals through a proposed harmonised set of rules to tax companies rather than leaving it to individual EU Member States.

Despite attempts to reach agreement, EU Member States have been unable to reach a compromise on its own proposals and the European Commission has since conceded that it will wait for progress at OECD level and revisit its proposals in 2020 if no progress is made. However, the COVID-19 pandemic has affected this timetable. A key OECD meeting due to be held in July 2020 to announce an interim decision has been postponed until October 2020. The OECD was not clear on what would be delivered at the October meeting and if they still intend to announce an interim decision. However, the OECD announced in early May 2020 that they still aim to announce a deal on DST plans by the end of the year. 

This deadlock has led several EU Member States to introduce their own initiatives for national taxes on digital companies which would include ‘sunset clauses’ and expire if an agreement is reached at international or EU level. Such initiatives may, potentially, lead to double taxation and differing views of the transactions covered and have also increased tensions at the global political level. On June 2, the United States Trade Representative (USTR) announced that it is launching investigations into DST adopted or being considered by the European Union and nine individual countries [1].

There have been concrete recent developments in the tax systems of Austria, Belgium, Czech Republic, France, Hungary, Italy, Poland, Slovenia, Spain and UK. All these countries have proposed, announced or already implemented some form of a digital services tax. Countries around the world have also started to announce DST plans, as of May 2020 twenty-two countries have either enacted or proposed some form of DST, this includes Nigeria, Kenya and Indonesia. Our analysis is aimed at providing an overview of the measures that some key Member States are introducing.

Country Rate Status Brief overview
EU 3% On hold (12 March 2019)
Targets businesses with annual worldwide revenues of €750 million and EU revenues of €50 million derived from the selling of advertising space, digital intermediary activities like online marketplaces, and sales of user collected data.
OECD
Consultation delayed
The OECD is focusing on delivering a longer-term “consensus-based” international solution addressing the fundamental issues.
UK 2% Implemented
Targets businesses that generate at least £500m of global revenue and over £25m of UK revenue from social media platforms, search engines and online marketplaces.
France 3%
Approved and on hold
Targets businesses that make €750m of global revenue and €250m of domestic revenue from online marketplaces, digital advertising and transmission of personal data. Suspension of collection of the tax until the end of 2020 pending OECD progress.
Italy 3%
Proposed
Targets businesses that would make €750m in global revenue and €5.5m in domestic revenue from online advertising, transmission of user data and provision of a digital interface allowing users to interact.
Austria 5%
Proposed
Tax on internet advertising revenue for all businesses with global revenues of at least €750m and domestic revenues of at least €10m. Additional measures relating to VAT on imports from non-EU countries and taxation of online sharing platforms are envisaged to complement the tax.
Czech Republic 7%
Announced
Targets businesses with global revenue of €750m or more, and that meet a certain yet to be established domestic revenue threshold from targeted advertising on a digital interface, use of multilateral digital interfaces, and sale of data collected about users of digital services.
Poland 3% Indicated
Taxation based on virtual permanent establishment or taxable digital presence in Poland established based on three thresholds - revenue, users, and digital contracts. The tax is expected to target revenue from online advertising, sale of data generated from user-provided information, and from other digital services.
Spain 3% Proposed
To apply as an indirect tax to businesses with an annual worldwide revenue of €750m or more during the previous calendar year and domestic revenue of at least €3m from online advertising, intermediation, and transfer of user data.
Belgium 3% Proposed
Targets businesses with a global revenue of €750m or more and a total taxable revenue in the EU of €50m or more. Taxation of revenues from three main activities: publishing online advertisements directed at users of a digital platform; selling of user data; offering digital platforms that expedite the interaction between users and the transfer of goods and services between users.
Hungary 7.5%
Implemented
Targets media content providers with a global tax revenue of 100m HUF (€305.326). Taxation of digital advertising revenues from three categories: the entity publishes advertisements for others, for itself, or the entity obtains advertising from a media content provider based in Hungary.
Slovenia
Announced
The Slovenian Ministry of Finance announced a proposal to introduce tax on digital services. The Ministry of Finance will initiate the preparation of regulations for implementation of digital services tax. The presentation of the legislative proposal is expected to be before April 1, 2020, and the adoption by September 1, 2020. No further details have been published yet.
Turkey 7.5% Implemented.

As of March 2020, taxpayers of DST have submitted their first DST returns.

Targets businesses with total worldwide revenue of at least €750 million and domestic revenue of at least TRY 20 million (approximately €3.137 million). Taxation of:

- Digital advertising services—including advertising control and performance measurement services, data transmission and management related to users, and technical services for the presentation of advertising;
- Sales of any audio, visual or digital content—including computer programs, applications, music, video, video games, in-game applications, etc., via a digital platform as well as services provided for listening, watching, playing or recording or using such content by use of electronic devices; and
- Services for the provision and operation of a digital platform by which users may interact with each other—including services to sell or facilitate the sale of a goods or services among these users.

Intermediary services provided by a digital platform to "the digital service providers" for the services noted above can also be subject to DST in Turkey.

[1] USTR targets countries that have implemented DST legislation (Austria, India, Indonesia, Italy, Turkey, and the UK) as well as some that just proposal such tax (Brazil, Czech Republic, and Spain).