Following the publication of the Finance Bill 2020 the UK government is pressing ahead with the introduction of the Digital Services Tax from 1 April 2020.
From 1 April 2020 the UK government is introducing a new tax in the form of the Digital Services Tax (DST). The DST is the UK’s unilateral attempt to correct the misalignment between the place where businesses’ profits are taxed and the place where those businesses create value.
Following on from the base erosion and profit shifting (BEPS) project, the Organisation for Economic Co-operation and Development (the OECD) has been exploring potential new taxing rights to seek to correct such misalignment. The UK government has said that it will converge its approach with the long term international solution once agreement has been reached on the basis that it believes in international co-operation regarding the future of tax on large international businesses. The UK government plans to review the progress made in international discussions in 2025.
In the meantime, the DST may have a significant impact on global digital businesses that are generating revenue from “UK users”. The key features of the DST are that it is an extraterritorial tax, meaning that a business does not have to be incorporated or based in the UK, and it is a tax on revenue and not on profits.
The DST may be relevant if a business undertakes a digital services activity, being the provision of:
- A social media service (promoting interaction between users or users and user-generated content)
- An internet search engine (allowing users to search the whole of the internet and providing links to third party websites)
- An online marketplace (facilitating the advertisement/sale of things by users to other users),
and the business generates revenue from users who it is reasonable to assume are normally in the UK, irrespective of where the business is located”.
If the DST is applicable, a 2% tax will be levied on group revenues derived from “UK users” of the digital services activities and there will be additional compliance and reporting obligations placed upon the business. The DST will only apply if the group receives £500 million of revenue from the digital services activities undertaken of which at least £25 million is attributable to UK users.