Under the measures announced in the 2018 UK Budget, chancellor of the exchequer Philip Hammond revealed that a digital services tax (DST) is to be introduced in 2020. The new tax will force larger digital businesses such as Google, Facebook and Amazon to pay tax on UK-generated sales.
The move is designed as an interim measure, pending global reform, to make sure that the corporate tax system is ‘sustainable and fair across different types of businesses’. It is predicted that the tax could raise £1.5 billion over four years.
Hammond explained in his budget speech that the digital services tax will not apply to start-ups. It will instead be paid by companies that are profitable and which generate at least £500m a year in global revenues in the business lines in scope. He said: ‘It’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business.’
The DST applies a 2 per cent tax on the revenues of specific digital business models where their revenues are linked the participation of UK users. The tax will only apply to revenues earnt from intermediating sales, rather than from making the online sale. It is not a generalised tax on online advertising or the collection of data, and businesses will 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.
There is, however, a review clause in place, meaning that the DST will be subject to formal review in 2025 to ensure it is still required following further international discussions on global reform and any potential global solution to ultimately replace the DST. Should this be the case prior to 2025, the government will dis-apply the DST.
A consultation on the design of the DST will be issued in the coming weeks, which the government intends to use to explore the key questions and challenges concerning its application, ensure it operates as intended and that it does not place unreasonable burdens on businesses. It will then be legislated for in the 2019/2020 Finance Bill, and apply from April 2020.
Reacting to the announcement, Stella Amiss, head of tax policy at PricewaterhouseCoopers (PwC) warned: ‘Working out who is taxed and who isn't in the digital economy is no mean feat when all businesses operate in an increasing technological world. It’s no surprise then that the Chancellor has approached this with caution - a narrowly targeted regime, a 2 per cent rate, and an effective implementation date pushed back to 2020. This new tax is well and truly aimed at the tech giants and not the online retailers so will do little to address the woes of bricks and mortar retailers and could well be perceived across the pond as an anti-American measure that could come back to bite us as the UK looks to move to trade talks after the Brexit deadline.’
Indeed, just days after the announcement, U.S. Chamber of Commerce president and CEO Thomas J. Donohue sent a letter to treasury secretary Steven Mnuchin on the potential for a European digital services tax, in which he pointed out that ‘proposing to tax revenues ignores the costs associated with sales. Such a turnover tax dissuades investment and discourages innovation and entrepreneurship.’
Donohue added: ‘These measures improperly target large American technology companies. Proponents have not been shy about their intentions in this regard. Targeting specific companies or sectors would set a dangerous precedent. In addition, “digitally enabled services” is not clearly defined in such measures and risks encompassing an even larger pool of companies. Finally, proponents have billed such measures as temporary solutions until an international consensus is achieved. To the extent European countries are seeking to generate revenues under the guise of promoting “fair taxation,” it is hard to imagine these taxes being lifted once such an agreement is reached. Moreover, adoption of a DST by one-or-more member states could prompt similar measures in others.’
He did state that the American business community supports international dialogue to make sure that global corporate tax system is fair and in line with ‘changes in the global economy,’ but concluded by saying that ‘unilateral European actions will erode trust and lessen the prospects for international agreement.’