The DST will apply from April 2020 and is intended to ensure that the digital businesses targeted pay their fair share of UK tax, an objective directly aligned with the 2015 OECD base erosion and profit shifting (BEPS) project.
It is important, however, to highlight the intended scope of the DST, that sits behind this headline.
- It would apply a tax of 2 per cent on digital revenues (not profits) generated from UK users.
- The digital revenues in scope would be those arising from search engines, social media platforms and online marketplaces.
- It would only apply to profitable businesses which generate global revenues in excess of £500m, of which at least £25m is linked to the participation of UK users, and the first £25m of UK revenues will not be taxable. These thresholds are intended to ensure that small businesses are not caught by these rules.
- It would not apply to the online sale of goods and will likely do little to redress perceived imbalances between the High Street and on-line retailers.
The Government has confirmed that DST will not be a generalised tax on online advertising or the collection of data, and that services such as the provision of online content, online payment services, sales of broadcast services, and the sale of software/hardware should all fall outside the scope of DST.
The Chancellor reiterated his position that a long term, multilateral reform of the taxation of the digital economy is needed. As such, DST is a temporary measure – it, and the progress of international discussions aimed at agreeing a new permanent international tax framework, will be reviewed by the Government in 2025 with a view to disapplying it when a global solution is in place .
Whilst the Chancellor has sought to restrict the scope of the DST, the expectation is that these new rules will hit many of the tech giants of Silicon Valley – Google, Facebook, Amazon, and AirBnB. Whether the DST will prompt a response from the US remains to be seen, but with the UK about to enter into a new trading relationship with the US following Brexit, the timing of the DST, even with its limited scope, is arguably not without political risk.
The Government published a consultation paper on DST on 7 November, with legislation set to follow in Finance Bill 2019/20. What is apparent from the consultation is just how much work is needed to ensure that DST operates as intended. This leaves many businesses facing uncertainty as they struggle to determine if their activities could fall within the scope of DST.
This uncertainty is an inevitable function of the incredible complexity of designing a taxation regime for global digital businesses. How the legislation will consistently and reliably identify digital revenues from UK users across diverse digital business models will not be straightforward and this is reflected in the scope of the consultation.
In short, DST will load additional compliance obligations on the taxpayer, and there is a significant risk that it will introduce yet more complexity to the UK tax regime . More complexity will only bring more uncertainty for taxpayers who could respond by redirecting investment away from the UK.
Clearly the Government is keen to implement DST to be seen to address the common perception that global tech businesses do not pay their fair share and because it has been budgeted to raise £1.5bn in its first four years. However, has the Chancellor taken an overburdensome risk with being the first mover on the taxation of the digital economy? Is that risk compounded by the uncertainty of Brexit and the intended UK:US trade negotiations? We must wait and see.