One of the headline measures announced yesterday in the UK Chancellor of the Exchequer’s final pre-Brexit Budget was the introduction of a new Digital Services Tax (“DST”). In summary, effective April 2020 the DST will apply a 2% tax on the revenues of specific digital business models where their revenues are linked to the participation of UK users.
The digital economy has been a focus of the UK government for some time. In addition to position papers published in the Chancellor’s 2017 Budget and the Spring Statement earlier this year, the UK has been a prominent force in the OECD’s base erosion and profits shifting (“BEPS”) project, the first action point of which is intended to address the tax challenges presented by the digital economy. Having apparently grown impatient with the lack of progress at an OECD level, the UK has decided to act unilaterally to protect its own tax base while simultaneously reaffirming its commitment to the BEPS project and committing to disapply the DST when an appropriate international solution is in place. The measure goes further than most other countries, although it is notable that Spain also proposes to introduce a digital services tax at 3% on digital services income by 2019.
The DST will apply to search engines, social media platforms and online marketplaces, all of which have been subject to considerable scrutiny from the UK tax authorities in recent years. These specific markets have been identified because the government considers they derive significant value from the participation of their users. In contrast, the Budget statement confirms that the DST will not apply to financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services.
The government has clarified that the DST is not a tax on the online sale of goods (it will only apply to revenues from intermediating such sales, not making such sales) nor a generalised tax on online advertising or the collection data. It will apply to revenues attributable to in-scope business models whenever they are linked to UK users. The Budget statement gives the following examples:
The DST is targeted at large multinationals. It will only apply to businesses generating annual global revenues of £500 million and so may be seen as an attack primarily on large US-headquartered technology companies. However, the proposal is likely to be welcomed by more traditional high street retailers which have struggled to compete with large online marketplaces. The first £25 million of relevant UK revenues will be exempt from DST.
Given the brevity of yesterday’s announcement, there is considerable uncertainty as to how the DST will apply. Much will depend on the detailed provisions, which will not be published for some time. The government will issue a consultation in the coming weeks, following which consultation process legislation will be introduced, likely in late 2019, to apply from April 2020. The government has committed to a formal review of the DST in 2025 to determine if it is still required in the light of international developments.