INSIGHTS ON UK DIGITAL TAX CONSULTATION

The UK government’s consultation on the design of a new 2% tax on digital services revenue closed at the end of last February.  

These are some of the insights from the approach we can infer behind the consultation document:

  • The tax is very narrowly targeted to certain digital business models to reflect the value they derive from the participation of UK based users. So rather than try to capture specific transactions, the target are full business models whose main elements are properly defined. Many of the definitions are based in practical observation of the operation of the targeted business models.
  • User base is a central value driver critical to success or failure of the business.

  • User participation is defined as:

    • Generation of content
    • Depth of engagement: many time spent in the platform, generation of content and inter-actuation with other users & content tailored to users based in their platform use.
    • Network effect & externalities
    • Users Co-contribute to the business offering and contribute to the brand of the platform by reviewing and rating content.
  • Business models / activities taxed:
    • Social Media Platforms
    • Search Engines: Much of the content delivered directly or indirectly by users of the platform. Experiences tailored to individual users. Key revenue driver is advertising.
    • On-line marketplace:  Facilitating sales. Development of a large user network in either side of the platform, encouraging users for public reviews to regulate the quality of the products they intermediate.
      Providing a platform to third parties to list products & services & communicate with prospective buyers.
  • Not in scope: 

    • Financial or payment services
    • Sale of own goods online (including direct sales of market places where they take title).
    • Revenue generated from direct sale of online content (TV-cine- music subscription services or online newspapers) where the business either owns the content or has acquired the right to distribute content.

The document makes an effort to define ‘user contribution’ but ask for input.

Once you fall in, likely all transactions should fall in principle unless you can probe that you have revenue of out of scope activities that is not ancillary to business model catch by the tax and is clearly identifiable.   

The UK DST would be tax deductible from the tax base, but its tax quota not creditable as it is not a corporate tax.

If a foreign digital company principal has a limited risk distributor in the UK, the DST generated for the portion of revenue billed locally will be a deductible expense in the UK LRD, but HMRC expects the cost of it to be passed to the principal with no decrease in UK Corporate Tax liability.

This UK proposal is based in user participation in selected digital business models and does not pretend to solve the taxing issue fundamentally but in the short run as the UK is also working at OECD level where some of the current options on the table to address action 1 would have a much wider spectrum.

But the document confirms that time to action on this topic is NOW, being the DST a temporary measure to be discontinued if an “appropriate global solution is successfully agreed and implemented”.

As for now, UK Government maintains DST expected entry into force target date April 2020.

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