Digital services tax - a bargaining chip?

24 January 2020

Now that the Conservative party has won the election and the UK is set to leave the European Union on 31 January, a question that arises is: will the digital services tax (DST) still be brought into legislation, as proposed, in April 2020, particularly in light of the intended trade deal the UK is yet to start negotiating with the United States? 

We know from the manifestos of the main UK political parties prior to the general election, that all had set out plans to tax the big global technology companies by way of a digital services tax. However, in early December, Steven Mnuchin (on behalf of the US Department of the Treasury) wrote to the Secretary-General of the OECD to offer support for and provide US input to the OECD’s work in addressing the issues faced by the international tax system. Importantly, however, Mnuchin’s letter urged that all national initiatives around digital services taxes should be suspended, citing that such taxes have a discriminatory effect on US based businesses and are inconsistent with current international tax rules.

Overview

The plan for the UK, at least prior to Mnuchin’s letter, was that the government will introduce a new 2 per cent tax on the gross revenues (after deducting an allowance of £25m) of search engines, social media platforms and online marketplaces which derive value from UK users, where a group of companies’ worldwide revenues from such digital activities exceed £500m and more than £25m of these revenues are derived from UK users. A single group entity will be responsible for reporting DST to HMRC and groups will be able to nominate that entity.

Potential impact on UK-US trade deal

We know that both Prime Minister Johnson and President Trump are very keen to agree a ‘massive’ trade deal once the UK leaves the EU. Whether the proposed UK DST will feature in any negotiation is uncertain, but one thought is that the DST will be introduced as planned in April 2020 to be used as a tool to trade as part of the UK-US trade deal negotiation.

We know that since France introduced its 3 per cent digital services tax in July 2019, the US has threatened certain French exports with tariffs of up to 100 per cent, including cheese, handbags and Champagne.

We mustn’t forget, however, that the US presidential election is scheduled for November 2020. Based on the time generally needed to negotiate modern trade deals, this means that any UK-US trade deal negotiations are likely to be in their infancy at election time. 

Who will be resident in the White House from 20 January 2021 appears, at this stage, to be an open contest - how this will affect any UK-US trade deal negotiations is of course unknown and whether the DST will even be implemented in April 2020 is still uncertain. US technology companies will certainly be watching this issue closely, in particular over the course of the next few months, to see how the UK and potentially other countries around the world, implement any digital services taxes.

For more information please get in touch with Suze McDonald.