The UK government announced it would move forward with a unilateral Digital Services Tax (DST). This tax would ensure certain businesses pay tax reflecting value that they derive from UK users. The UK government has issued a consultation document on the design of this new tax.
Overview of the consultation
The measure proposed in the consultation document introduces a 2% tax for certain revenues arising after 1 April 2020. This would apply to businesses generating revenue of more than £500m, and UK revenues of at least £25m, from relevant activities.
The introduction of the DST and rate of the tax are not being consulted upon. Rather the consultation focuses on the:
- Definition of business activities within the scope of the tax
- Determination of taxable revenues
- Design of a safe harbour provision for low margin or loss making businesses
- Potential impact of the DST being a deductible expense for corporation tax purposes
- Mechanism for reviewing the DST in light of any global action that emerges
- Reporting and payment mechanics.
Business activities within the scope of DST
The government’s preferred approach is to define business activities that derive the most value from user participation and then impose tax on revenue associated with those activities. The in-scope business activities are the provisions of search engines, social media platforms and online marketplaces.
The following activities would be specifically out of scope:
- The provision of payment or financial services
- The sale of own goods online
- The provision of online content
- The provision of radio and television broadcasting services.
The determination of taxable revenues
Taxable revenues will be revenues derived from in-scope activities that relate to UK users (‘UK revenue’), wherever those revenues are realised. The first £25m of revenues that relate to UK users will be exempt from DST. Where in-scope activities are integrated with out of scope activities, the revenues will need to be apportioned.
Where revenue is derived from online advertising, UK revenue will be defined as revenue from adverts displayed to UK users. Where revenue is derived from other forms (subscriptions, commission, etc.) the determination will be made by reference to whether the payment comes from a UK user or relates to a transaction that involves a UK user.
A user may include an individual, corporate or other legal person. A ‘UK user’ will be defined by reference to their physical presence; this may be determined by the typical location of the individual or other such as IP address or other customer information.
The safe harbour
The proposed measures include a safe harbour to protect loss-making businesses or businesses with very low profit margins from the scope of the tax - the precise design of this will be consulted upon.
DST as a deductible expense
It is envisaged that DST would be outside the scope of existing tax treaties and not otherwise available for credit against UK corporation tax. However, the government proposes to allow a deduction against taxable income in accordance with existing rules on the deductibility of expenses of a business.
The Government is introducing the DST as a temporary measure until a global solution can be reached. It intends to legislate for the DST to be reviewed in 2025 to assess whether it is still required.
The UK government reiterated that its preferred option is coordinated global action to reform the taxation of highly digital businesses. However, it is also of the view that progress at a multi-lateral level has been too slow.
Reporting an payment mechanics
Under the current proposals, businesses will need to notify HMRC within three months of the first period in which they become liable to the DST. An annual filing will be required to report certain details to HMRC - such as revenues and the liability itself. Businesses would pay the DST in quarterly instalments, in line with the existing regime for corporation tax for large corporates.
Both incorporated and unincorporated businesses would be liable, and there may be a requirement for the ultimate parent to nominate a reporting company on behalf of the group.
Businesses will need to establish systems and processes to enable them to collate the data required to assess the individual application of these emerging taxes. Affected businesses should engage with this consultation to ensure that the tax is not overly onerous to administer in practice.
The UK is adding its name to a growing list of territories that are introducing taxes on digital businesses. It remains to be seen whether increasing unilateral action will have the effect of accelerating or decelerating global discussions.
Read more on the Finance Bill 2018-19