Disecting the UK Digital Services Tax July regulatory package

The UK Government published last July a draft version of their Digital Services Tax regulation, as part of a package containing also the Government response to the key questions from public consultation observations, and a document with additional Guidance and explanations.

The text evolved the approach of taxing business models to taxing digital services activities, which is still a concept wider than a specific digital service.  The revenue to be taxed is that of the relevant activities when deriving from a UK user contribution (engagement or interaction).  

Digital services activities in scope:  

Social media platform”: online platform whose main purpose, or one of the main is to promote interaction between users  and that enables content to be shared with other groups of users.

Online marketplace”: online platform whose main purpose, or one of the main purposes is to facilitate the sale by users of particular things to other users, or to advertise or otherwise offer to other users particular things for sale.  An exception for Financial Services e-marketplaces is in the text.

In this context, “thing” means any services, goods or other property; and the  reference to the sale includes hiring it.

“Internet search engine”

Additionally, there is now a new definition affecting the 3 type of digital activities, which is carrying on any associated (to those) online advertising business.

 The revenue is attributable to UK users when:

·        The advertising is intended to be viewed by UK users or when it arises in connection with UK users

·        The online marketplace revenues arise in connection with a transaction to which a UK user is a party, or with the sale of an interest in premises or land in the United Kingdom, or includes the provision of accommodation in the United Kingdom  

An additional nuance introduced for online advertising revenues is that it includes both revenues from the provision or the facilitation of online advertising;

Annual DST Threshold

Total amount of digital group services revenues exceeding £500million, AND

total amount of UK digital services revenues of the group exceeds £25million.

DST liability calculation

 The total amount of UK digital services revenue of the group, will be reduced in £25million before applying the  2% tax rate.  The net result is “the group amount” to be paid, whose liability will be allocated to each group legal entity that obtained the revenue.

In the case of e-market places, 100% of the DST liability is to be paid if the other user of the transaction is in a country with no DST or equivalent in place. In case there is, there is a relief that disregards 50% of the obtained revenue.

 Alternative basis of DST Group liability calculation, as a safe-harbor

A new element is that the tax payer has the option to chose an alternative way of computing the tax liability instead of the standard one, an can opt activity by activity (all, part, or none). This is for the case any of the in-scope activities of the group has a compromised profitability or is loss making.

It requires first a breakdown of the UK digital activities services revenue and apportioning it between the 3 categories, discounting to each one its relevant proportion of the £25million threshold.  It requires also the operating margin of each activity in scope.  Then, the taxable amount for each revenue category is 0.8 times the operating Profit.

For using this computation, a group must logically be able to segment the relevant operating expenses per category of revenue, excluding interest expenses, business acquisition expenses, extraordinary items, assets impairment charges, taxes.

For any other category of revenues not opted-in, the taxable amount remains 2% of the net  revenues.   

Compliance, data source and timeframe

UK DST is due and payable on the day following the end of 9 months after the end of the accounting period. The responsible member to pay the DST is the parent of the Group unless any other legal entity has been nominated by it by written.

Accounting base for the DST:  Any reference to a group’s accounts is to the consolidated accounts of the group’s parent and its subsidiaries.

The “applicable accounting standards” are those governing the group accounts, (UK GAAP; US GAAP;…. otherwise, IAS.

Anti-avoidance rules

The draft contains anti-abuse rules, and any “relevant avoidance arrangements” or scheme or series of transactions will be amended or disallowed by HMRC if their main or one of their main purposes, is to enable a person to obtain a tax advantage (avoidance, reduction or deferral)  in respect to DST application.

There are a good number of additional enforcement and control rules in the July 09 draft text.

DET3 COMMENTS

Despite the international political turbulence, the work under this UK DST regulatory draft package is deep, indicating a strong behavioral intention to pass it and enforce it.

The introduction of a main activity test that can be interpreted from the definitions is something logical and that we have been claiming for other countries unilateral regulations.

The draft seems more detrimental in terms of Digital Advertising than the rules of the EU draft directive because of the inclusion of the “associated online advertising activity revenue” of the 3 activities as in scope and the incorporation of the intermediary roles revenue in the saturated and big WW Adds value chain.

The inclusion of renting as comprehended by the definition of sale of a thing in the online market places case might affect many new and disruptive digital value propositions based on subscription or flexible consumption models that work cross-border.

The thresholds are indicative of a targeted approach and a commensurate with compliance effort approach for the taxpayer and more logical than those of other unilateral drafts.  

The allowances and reliefs included are addressing some of the concerns expressed by the stakeholders during the recent consultation and are contemplating a good number of the potential cases around, with practical explanations included.

Will we see a Bush Administration counter-act to this close allied initiative? Is the UK Gin the new French Borgona? Or does the pharma UK sector need to put an eye on the conversation?  An interesting period ahead.  

EU PRESIDENCY UPDATES DIGITAL SERVICES TAX DIRECTIVE

On November 29th 2018, the EU Presidency sent to the Council the revised proposal for a Directive on the common system of a digital services tax on the revenue from certain digital services, that was made public yesterday before the ECOFIN ministers meeting, where we also knew the last minute agreement reached before the meeting between Germany and France on the topic (the “Franco-German joint declaration” (*).

This last movement has been perceived by some as a relevant step back and by others as the potential enabler of a final consensus and it will likely affect the work that was done in developing the Directive draft, as it brings to the negotiation table an important cut down of the number of services in scope.

In any case, the new Directive text updates the March draft and it is considered a compromised agreement text accepted by a good number of countries. Presidency mentions that it is time then for the political segments of the EU to take a clear stance on this now.

As we have commented on the previous Directive draft, and published our contribution to the public comments period in our reports section, we focus now on the novelties and differences we see as relevant in the text at first glance:

  • User definition: includes now not only any legal person, but any “legal arrangement, whatever its nature is, that accesses a digital interface with a device”.
  • Target advertising definition incorporated: Confirms that it is about digital promotional communications targeted at users of a digital interface based on data collected on them. And not generic digitally displayed advertising. Burden of proof to support undeclared “non-targeted” advertising is now on the taxable person.
  • Removal of the previous complex references to financial systematic internalizers and crowdfunding schemes, to be replaced by straight “regulated financial service” or “regulated financial entity”, concepts that are included in the definitions article and that are subject to authorization and supervision under “any” harmonization measure adopted by the EU, including providers subject to equivalent non-EU supervisory measures.

The supply of regulated financial services by regulated financial entities are not subject to the tax.

  • Sales of Data generated with user participation: sales of data captured with sensors (IOT) or sale of data by a regulated financial entity are also clarified as not subject in the current text.
  • In order to qualify for being a tax payer, thresholds remain at group level, whereby now in the new text the taxable person will be every individual entity of the group providing taxable services and not the group as a whole.

It will be possible nonetheless for one single entity of the group to file one consolidated return on behalf of all the liable taxable entities (MOOS equivalent).

  • Under the new text, non-EU established groups, that have several companies in EU member states who become liable, could see any of these EU based companies being required by a Member State of the other EU based entities to pay in that country on behalf of their local failing company.
  • Timeframes for Directive implementation: Transposition timing limit is moved further from December 2019 to December 2021 in this draft. Entry into force, from January 1st 2020, to January 1st, 2022.
(*) The impact and consequences of the Franco-German declaration will be subject to a separate analysis in another post/article coming soon, but please see the EU Digital Services Roadmap we publish today, incorporating  the potential effects of such declaration with a visual perspective.