On 11 July 2019 the UK government published a document summarising the responses to the consultation on the design of the digital services tax (DST).
The DST is to be implemented from April 2020. Certain digital business models derive value from the participation and engagement of an active UK user base and the DST will aim to collect revenue from this activity pending the agreement of international tax rules. The DST will be a 2% tax on revenues from providing a social media platform, search engine or online marketplace to UK users. The tax would be charged where the revenue from the relevant business activities is greater than GBP 500 million and more than GBP 25 million comes from UK users. Businesses would not be charged DST on the first GBP 25 million of UK revenues and would also have the option of using a safe harbour provision.
The UK government held a consultation on the design of the DST from 7 November 2018 to 28 February 2019 and received 79 responses as well as holding some meetings with stakeholders. Most of the responses recognised the digital challenges facing the international tax system, and supported the current OECD process to deal with the tax challenges of digitalisation by 2020. Some of the commentators were cautious about the risks of unilateral action and of problems that could arise from a revenue-based tax. Other responses emphasised the benefit of allowing taxpayers to achieve greater certainty when assessing their liability; the need for taxpayer guidance on understanding the DST; and the technical challenges that could arise in calculating the liability to DST such as identifying the location of users.
The UK government is proceeding with the tax as outlined in the original consultation document with the level of the allowance and the thresholds at the same level as originally proposed. The DST will be deductible as a normal business expense but not creditable against UK corporation tax. The safe harbour provision will be retained at the levels set out in the consultation document.
Certain changes are to be made to the original design of the tax. As some other countries are also planning to introduce taxes on digital services there is a risk of double taxation on some cross-border transactions. To guard against this possibility the UK will limit the revenue charged to the UK DST if one of the users involved in a particular transaction is located in a country that also has a DST applicable to that type of transaction.
The DST will now be payable on an annual basis rather than in quarterly instalments as originally planned. There will be a financial and payment services exemption for providing an online marketplace, and the next stage of the consultation will ask for comments on designing this exemption. To simplify administration the DST is to be computed and reported at the group level, and the group will be required to nominate a group member to complete the reporting requirements for the group. The DST will still be payable by the group members generating the relevant revenues.
The UK government will continue to look at some of the policy issues in the next two months. The technical consultation on remaining issues will continue until 5 September 2019 before the final draft of the law and further guidance is drawn up.
