November 19, 2018

In his Budget last month, the Chancellor announced that the Government intended to introduce a 2% digital services tax to ensure that “large, established, digital services companies pay their fair share”. The Chancellor also said that the Government would be consulting on its proposals. That consultation has now been published.

The Government explains that it believes the international tax framework is failing to achieve the overarching principle of a country’s right to tax a multinational group on the profits it derives from activities undertaken, and value generated, in their jurisdictions in relation to “certain highly-digitalised business models” that derive value from the participation of their users. In the Government’s view, this is leading to a mismatch between where business profits are taxed and where value is created.

The Government says that its ultimate objective is to address these challenges through reform of the international corporate tax framework. Accordingly, it has been leading multilateral discussions at the level of the OECD/G20, with the aim of reaching consensus on the principle for reform. That includes proposals to update the international tax framework to allow jurisdictions to tax profits that businesses derive from the activities of local users.

In the meantime, the Government says it has decided to take interim action and introduce a tax on the revenues of “certain digital business activities” to ensure tax is paid that reflects the value derived from UK users.

The Government explains that its proposed Digital Services Tax (DST) is not a tax on online sales. Nor is it intended to be a generalised tax on businesses that provide digital services, collect data or generate revenue from online advertising.

Instead the DST will be a “narrowly-targeted 2% tax on the UK revenues of digital businesses that are considered to derive significant value from the participation of their users”. The tax will apply from April 2020, and be legislated in Finance Bill 2019-20.

In more detail:

• the tax will be applied by reference to specific digital business activities;
• which the government considers derive significant value from users;
• the business activities within scope will be the provision of a social media platform, search engine or online marketplace;
• the tax will apply to the revenues generated by these taxable business activities, where those revenues are linked to the participation of a UK user base;
• a business will only become taxable if it:
  • generates more than £500 million in global annual revenues from in-scope business activities;
  • generates more than £25 million in annual revenues from in-scope business activities linked to the participation of UK users;
• businesses will not have to pay tax on their first £25 million of UK taxable revenues;
• the tax will include a “safe harbour” which will allow businesses to elect to make an alternative calculation of their DST liability, and will be of value to those with very low profit margins; and
• the tax will be deductible against UK Corporation Tax under existing principles, but it will not be creditable.

The Government says that it will dis-apply the DST if an appropriate global solution is successfully agreed and implemented. Further, the legislation enabling the DST will include a clause that requires the tax, and the progress in international discussions, to be reviewed in 2025. The outcome of that review will then be reported to Parliament.

The Government welcomes comments on its proposals by 28 February 2019. To access the consultation, click here.