On 29 October 2018, the UK Chancellor, Philip Hammond announced that from April 2020, the UK government will introduce a new 2% tax on the revenues of certain digital businesses which derive value from their UK users – the Digital Services Tax or DST.
At this stage, only a high level outline of the DST proposals has been published. The government will be issuing a consultation on the design of the DST in the coming weeks. Draft legislation is likely to be published in July 2019.
The DST is intended to be an interim measure, pending a hoped-for comprehensive global agreement on the taxation of digital businesses.
Overview of the DST
The DST will:
- apply to revenues (not profits) generated from the provision of the following business activities: search engines, social media platforms and online marketplaces;
- apply only to groups that generate global revenues from in-scope business activities in excess of £500 million per annum, targeting multinational enterprises;
- be levied only on revenues from those activities that are linked to the participation of UK users, subject to a £25 million per annum allowance. This means that start-ups and small businesses will not be in scope of the tax; and
- include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profits.
The link to UK users
The DST will apply to the revenues that are attributable to in-scope business models whenever they are linked to UK users. This means that, for the purposes of the DST, what matters is the location of the user, not the business.
The UK Government has stated that the following will be subject to DST at 2%:
- advertising revenues generated by social media platforms or search engines from adverts targeted at UK users;
- revenues from displaying advertising against search terms inputted by UK users;
- commission received by online marketplaces from facilitating a transaction between UK users.
What’s outside the scope of DST?
The DST should not to apply to:
- the seller’s revenue from an online sale of goods;
- financial and payment services;
- the provision of online content;
- sales of software or hardware; or
- television or broadcasting services.
The government will be issuing a consultation on the design of the DST in the coming weeks. It intends to use this consultation to explore the key questions and challenges concerning the application of the DST, to ensure it operates as intended and that it does not place unreasonable burdens on businesses. The DST will then be legislated for in the Finance Act 2020 and will apply from April 2020.
What about the international discussions on a digital tax?
The UK has been an active participant in OECD, G20 and EU discussions about how to tax global digital businesses and the Chancellor acknowledged that an international solution would be the best option. However, given the slow pace of such deliberations and the lack of support from the US, the UK is forging ahead with its own initiative. If an international approach has been agreed before the UK tax comes into effect in April 2020, the UK will consider dropping the digital services tax in favour of the agreed international approach. The DST will be subject to formal review by the UK Government in 2025 to ensure it is still required following further international discussions.
The DST is proposed as an interim measure, with a modest projected tax take (£400 million estimated in the first year). The question therefore arises whether it is a serious revenue-raising tax or an attempt by the UK to create pressure for a global solution before April 2020.
By going it alone, the UK takes the risk of retaliatory action by the US. Some US business groups and US politicians have already made negative comments in the press, with a UK Treasury spokesperson responding that “…[the DST] is a proportionate and targeted interim response that reflects the changing global economy, and how digital businesses derive value from users – it’s not targeted at any country and seeks to ensure the tax system is fair.”