Digital Services Tax

October 30, 2018

The HMRC document is reproduced in edited form below. Some comment is beneath it.

The government remains committed to reform of the
international corporate tax framework for digital businesses. However, pending
global reform, interim action is needed to ensure the corporate tax system is
sustainable and fair across different types of businesses. Therefore, to ensure
that digital businesses pay tax that reflects the value they derive from UK
users, the government has announced that it will introduce a Digital Services
Tax (DST) which will raise £1.5 billion over four years.

The development of the digital economy has brought
significant benefits to all of us, but poses a challenge for the international
corporate tax system. The government has set out these challenges in two
position papers, published at Autumn Budget 2017, and Spring Statement 2018.
They explain the need to reform international tax rules to ensure they reflect
the value users create for digital businesses. While the government believes
that the long-term answer to these challenges is reform of the global tax
system – and has been pushing for that to happen internationally – the outcome
of that process remains uncertain. As a result, the government has decided to
act now and will introduce a Digital Services Tax (DST) from April 2020. The
DST will raise £1.5 billion over four years and ensure digital businesses pay
tax in the UK that reflects the value they derive from UK users.

The government will continue to lead efforts with its
partners in the EU, G20 and OECD to reach international agreement on future
reforms to the international corporate tax framework, and will dis-apply the
DST when an appropriate international solution is in place.

How will the tax work?

The DST applies a 2% tax on the revenues of specific digital
business models where their revenues are linked the participation of UK users.
The tax will apply to: search engines; social media platforms; and online
marketplaces. That is because the government considers these business models
derive significant value from the participation of their users.

The DST is not a tax on online sales of goods – as a result
it will only apply to revenues earnt from intermediating such sales, not from
making the online sale.

It is also not a generalised tax on online advertising or
the collection of data.

It is also not a generalised tax on online advertising or
the collection of data. Businesses will only be taxed on the revenues derived
from these services to the extent they are performing one of the in-scope
business models, which are the provision of a search engine, social media
platform or online marketplace.

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. For example:

  • if a social media platform generates revenues from targeting
    adverts at UK users, the government will apply a 2% tax to those revenues
  • if a marketplace generates commission by facilitating a
    transaction between UK users, the government will apply a 2% tax to those
  • if a search engine generates revenues from displaying
    advertising against the result of key search terms inputted by UK users, the
    government will apply a 2% tax to those revenues

The DST is intended to be narrowly-targeted, proportionate
and ultimately temporary, pending a comprehensive global solution. As such it
includes the following features:

  • A double threshold – this means businesses will need to
    generate revenues from in-scope business models of at least £500m globally to
    become taxable under the DST. The first £25m of relevant UK revenues are also
    not taxable. This means that small businesses will not be in scope of the tax.
  • A safe harbour – this means that businesses can elect to
    calculate their liability on alternative basis, which will be of benefit to
    those with very low profit margins. The outcome is that those making losses
    under this calculation will not have to pay the DST and those with very low
    profit margins will pay a reduced rate of tax. The government will be
    consulting on the precise design of the safe harbour which is intended to ensure
    the DST is proportionate.
  • A review clause – this means that the DST will be subject to
    formal review in 2025 to ensure it is still required following further
    international discussions. This underlines the government’s commitment to
    continue seeking a global solution to ultimately replace the DST. In addition,
    the government will dis-apply the DST if an appropriate international solution
    is in place prior to 2025.

The DST will be an allowable expense for UK Corporate Tax
purposes under ordinary principles. However, given the DST will not be within
the scope of the UK’s double tax treaties, it will not be creditable against UK
Corporate Tax.

Financial and payment services, the provision of online
content, sales of software/hardware and television/broadcasting services will
not be in scope of the DST. The government will explore with stakeholders
during the consultation whether further exemptions should be made.

The government will be issuing a consultation on the design
of the DST. It intends to use this consultation to explore the key questions
and challenges concerning the application of the DST, ensure it operates as
intended and that it does not place unreasonable burdens on businesses. The DST
will then be legislated for in the 2019/2020 Finance Bill, and apply from April

Anticipated yields from DST 2019/20 – £5 million, 2020/21 –
£275 million, 2021/22 – £370 million, 2022/23 – £400 million, 2023/24 £440

Laurence Eastham writes

One good reason for being confused about how this is going
to work is that clearly the government itself has little idea. A consultation
on almost all the key aspects tends to give that game away.

Moreover, I strongly suspect that it will never actually
happen but falls into the category of ‘things that we must be seen to be doing’.
The emphasis on the continued hope for international agreement and the
readiness to ditch the DST in the event that such an agreement is reached would
suggest that implementation can be delayed if international agreement is
pending. Indeed, it would make no sense to impose DST for a short-term and then
switch to the international model. Of course, the cynic would say that
international agreement might be ‘pending’ for a very long time, especially
when there are pretty easy gains for those, states and businesses, currently
benefiting from the current regime and some competitiveness issues for the UK.