UK digital services tax about to take effect

Beginning next month, the UK will start imposing a new 2% tax on the revenues that companies like Google, Facebook, and Amazon earn from UK persons by operating social media platforms, search engines, and online marketplaces.

Barring a last-minute change, the digital services tax (DST) will apply to revenue from 1 April onward that these tech giants derive from users in the UK, under the budget that Chancellor of the Exchequer Rishi Sunak announced 11 March. Businesses will be liable for the DST if the group’s worldwide revenues from these digital activities exceed £500 million ($605 million) and if more than £25 million ($30 million) of the revenues are derived from UK users. The tax will be payable and reportable annually.

The DST will likely be a topic of discussion in negotiations between the UK and the US over a free trade agreement. The US government reportedly believes the new tax discriminates against US-based tech giants and has made veiled threats to respond with retaliatory tariffs.

Key features of the DST

In a 11 March policy paper, Her Majesty's Revenue and Customs (HMRC) describes how the DST will work:

• The new tax will be 2% of revenues (not profits) derived from UK users.
• A UK user is an individual who is “normally located in the UK, or other type of user established in the UK”.
• The taxable revenues “will include any revenue earned by the group which is connected to the social media service, search engine or online marketplace, irrespective of how the business monetises the service”. This covers revenue associated with advertisements that are viewed or otherwise consumed by UK users.
• There is a £25 million allowance so that a group’s first £25 million of revenues derived from UK users will not be subject to the DST.
• The total DST liability will be calculated at the group level, but the tax will be charged on the individual entities in the group.
• The online marketplace definition exempts financial services providers.
• Groups will be able to elect to calculate their DST under an alternative calculation, which is intended to ensure that the tax does not have a disproportionate effect on “business sustainability in cases where a business has a low operating margin from providing in-scope activities to UK users”.

The government will terminate the DST “once an appropriate international solution is in place”, HMRC says, referring to ongoing efforts by the Organisation for Economic Co-operation and Development to address the tax challenges posed by the digitalisation of the global economy.

The DST is necessary, HMRC says, because there is a “misalignment between the place where profits are taxed and the place where value is created” under existing international corporate tax rules.

First announced in Budget 2018, the DST will be implemented through provisions contained in the Finance Bill 2020. The Association of International Certified Professional Accountants previously expressed its concerns about the proposed UK digital services tax (see “Association Urges Rethinking on UK Digital Services Tax”).

— Dave Strausfeld, J.D., (David.Strausfeld@aicpa-cima.com) is an FM magazine senior editor.