Legislation on the introduction of a UK Digital Services Tax (DST) has been released by the UK government. A draft of the Finance Bill 2019/20 was released on 11 July 2019, with accompanying explanatory notes on how the DST would be introduced.
The government has said it remains committed to a long-term solution to the tax challenges arising from digitalisation, but believes that more immediate action is required in the short term at a unilateral level to tackle these challenges
What did we already know?
From prior announcements, we were aware that:
DST will be levied at 2% on gross revenues of specific digital activities, where these revenues are linked to the participation of UK users.
The three business models that will be ‘in scope’ are: search engines, social media platforms and online marketplaces.
DST is not intended to penalise the UK user, or be a tax on online business. The tax will apply to revenues earned from the intermediation of sales where UK users have driven the value allowing for those sales to take place.
A number of other digital business models will be specifically ‘out of scope’: financial and payment services, providing online content, software / hardware sales, television and broadcasting services.
A ‘double’ threshold will be in place to ensure DST only affects the largest digital businesses. Only groups with global revenues from in-scope business models of more than£500 million will fall within scope, and the first £25 million of relevant UK revenues will always be exempt.
Safe harbours will be in place so that loss-making businesses are not subject to DST, and low-profit-margin businesses will be charged at a reduced rate.
DST is intended to be temporary, until international consensus is reached; and there is a commitment to review its necessity in 2025.
What did we find out today?
The legislation released is broadly consistent with the above principles, in terms of the targeted business models, the rate and the double threshold to target only the largest multinationals.
‘In scope’ business models now specifically includes the carrying on of any associated online advertising business which derives significant benefit from its connection with a social media platform, search engine or online marketplace. This seems to be a targeted effort to ensure that online advertising activities are within the scope of the measures.
UK digital services revenues includes any revenue earned by a group which is connected to the relevant business activities – regardless of how the business actually monetises its platform.
Only financial marketplaces and payment services providers are specifically excluded from the relevant definitions of online marketplace. This does not mean that other business models which were expected to be out of scope and now within the scope of the rules – merely that they have not been specifically noted as out of scope.
A UK user has been briefly defined as someone who it is reasonable to assume is normally in the UK. Only one party to a multi-party transaction need be in the UK for all of the revenues from that transaction to be within the scope of the measures. The exception to such a rule is where the second jurisdiction involved in the transaction also applies a tax which is “similar” to DST – in which case 50% of the revenues will be included.
An alternative basis of calculation has been included which a taxpayer can elect to apply. This is a formulaic approach to ensure the those with low profit margins are not adversely impacted. The approach includes an 80% operating margin cap as per the suggestion in the consultation document.
All revenues of the group will be aggregated for the purposes of calculating any potential exposure, with the group’s ultimate parent or another elected party then responsible for reporting and remittance. DST is payable nine months and one day after the end of the accounting period. It will be reported and payable on an annual basis.
What happens next?
The legislation and notes released today are brief, and there is no accompanying guidance. This leaves the door open for uncertainty and I would encourage taxpayers and HMRC to begin an open dialogue about how to calculate any exposure. Businesses must now delve into the detail to begin to answer the big questions such as:
Does my business model, in whole or in part, fall within one of the ‘in scope’ models?
How do I track my ‘users’, and apportion these between UK and non-UK users for the purpose of tracking digital services revenues?
We would also urge the UK government to remain an integral part of the OECD level discussions on the tax challenges of the digital economy, with a view to ensuring the Digital Services Tax is a short term measure. The sunset clause contained in the law recommends a review of DST by 2025 – which for those looking for a multinational solution to these challenges is too far into the distance.