Following French President Macron’s recent decision to cancel France’s 3% Digital Services Tax (DST), on 22 January 2020 at the World Economic Forum in Davos, the UK Chancellor confirmed the UK Government’s plans to proceed with their own UK DST in April 2020.
There have been a number of reactions from both sides of the Atlantic in recent days regarding both the French and UK decisions. In this article, we focus on the current UK position towards DST.
UK Digital Services Tax
From April 2020, the UK DST will impose a 2% tax (albeit lower than Italy’s 3% DST, which is forecast to generate over Euro 700 million per annum) on the revenues of large businesses providing internet search engines, social media platforms and online marketplaces to UK users.
The UK DST will apply to corporate groups generating worldwide revenues of more than £500 million, whereby at least £25 million of this revenue is derived from UK users.
Practically, the UK DST will be calculated based on a “UK user contribution” to global revenue, with there being different criteria for what constitutes UK user participation, depending on the activity in question. For example, advertising revenue may be considered to be derived from UK users when the advert is directed towards UK users.
The first £25 million of revenue derived from UK users will not be subject to the UK DST.
Digital Services Tax in a broader context
Like all of the unilateral DSTs being imposed and proposed at present, the UK DST must be viewed in the context of the wider international tax challenges, potential solutions and proposed changes. Vistra has covered these in recent articles.
Relevantly, and in recognition of the fact that the UK Government sees their DST as a short-term measure pending more comprehensive global tax changes, the UK DST will be disapplied once an “appropriate international solution” is in place. If the Organisation for Economic Cooperation and Development (OECD) achieves a global agreement on the taxation of technology multinationals by the end of 2020, the UK DST may be replaced by a much broader, more far-reaching basis of taxation under the OECD’s ongoing BEPS proposals.
Numerous countries are implementing their specific DSTs, and the global tax laws are changing at pace. Multinational companies should review their internal and external global supply chains against the current international and domestic tax requirements in the countries in which they operate. Performing a review will ensure that they are not only compliant but also avoid potential non-budgeted future cash tax outlay.