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
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;
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
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.
base for the DST: Any reference to a
group’s accounts is to the consolidated accounts of the group’s parent and its
accounting standards” are those governing the group accounts, (UK GAAP; US
GAAP;…. otherwise, IAS.
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.
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.