While the UK Government believes that the long-term answer to develop a “corporate tax framework for digital businesses” needs to be a coordinated international effort, the outcome of that process remains uncertain and the progress has been “painfully slow” according to UK Chancellor. That is why the UK Government has communicated in November 2018 the decision to introduce a Digital Services Tax (DST) from April 2020.
“Interim action is needed to ensure that digital businesses pay tax that reflects the value they derive from UK users”, a tax which is expected to raise £1.5 billion over the 2020 to 2024 period, applying a 2% rate.
The target seems to be the revenue from specific transactions of defined Digital Business Models, when those revenues are linked to the participation of UK users.
Business models under scope and specific connected transactions initially mentioned, are:
• Search engines: Advertising in search engines
• Social media platforms: Advertising targeted to local users
• Online marketplaces: Intermediation fee
Tax will only arise to the extent it is obtained through one of the in-scope business models, whenever they are linked to UK users. Like the EU Draft Directive, the focus is on location of the user, not of the business or billing/collection place.
The DST it is “narrowly-targeted, proportionate and ultimately temporary”, including the following features:
• A double threshold: minimum WW revenues from in-scope business models of at least £500m to become taxable, with the first £25m of digital in scope UK revenues exempt.
• A safe harbor: through an specific procedure, companies making losses or with very low profit margin will not have to pay the DST.
• A review clause: UK DST will be subject to formal review in 2025 at the light of international discussions status. The government will unwind it if a coordinated solution is in place prior to that year.
Like in the EU Directive, the UK DST will be an allowable expense for Corporate Tax purposes but not creditable against UK Corporate Income Tax.
Out of scope: The note states that financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services will be out of scope of the DST.
The government will be issuing soon a consultation on the design of the DST to ensure “it does not place unreasonable burdens on businesses”. The DST would then be legislated for in the 2019/2020 Finance Bill, and start to apply from April 2020 if passed.
As for today, this is just a formal communication of a Decision and not yet a draft bill that will only come after the consultation. Despite the swings in position about timing on action of the last months, UK Government is clearly asserting its position now, in a movement that will also grant them a little more perspective to understand what will happen at OECD level by 2020.
The focus it is clearly on business models first and second transactions, sculpting in this way certainly a narrower scope than the EU envisaged model, with easy to identify targets behind.
The text of the UK communication does not talk about a digitalized economy but about a “tax framework for digital businesses”, that signals a departure from the “no-ring fence” OECD approach.
In terms of Digital/Tech unicorns, the pre-Brexit UK is one of the EU area members with more companies in the ww-ranking, and some of them play in the e-commerce marketplace arena, but the difference in size with their foreign counterparties is still huge, while in terms of social media / search engine business models arenas, 2 foreign companies cope around 2/3ds of ww digital-advertising market…