UK and International Tax news
HMRC Consults On A Digital Services Tax
Thursday 15th November 2018
HMRC has issued a consultation document on the Government’s intention to introduce a new Digital Services Tax [‘DST’] as an interim response, pending global reform, to the challenges that digital businesses create for the international corporate tax system.
The international corporate tax framework is underpinned by the principle that the profits of multinational groups should be taxed in the countries in which they create value, in particular, on the profits derived from activities undertaken and value generated in their jurisdictions. However, the government believes the international tax framework is failing to achieve this principle in relation to certain highly digitalised business models that derive value from the participation of their users, and there are mismatches between where business profits are taxed and where value is created.
Given this, the government has been leading multilateral discussions at the level of the OECD/G20, with the aim of reaching consensus on the principle for reform and a detailed approach that delivers on that principle. That includes consideration of the approach set out in the government’s March 2018 position paper, which set out a model for how the international tax framework could be updated to allow jurisdictions to tax profits that businesses derive from the activities of local users.
Whilst the OECD is undertaking a fundamental review of the concepts of nexus and profit attribution, that review will be a challenging process given the fundamental nature of the issues being addressed, and the different country perspectives on those issues, as identified in the OECD’s interim report. It will take significant time before agreement on a principle for reform is translated into a detailed model and then reflected in countries’ international tax treaties.
It is against this background that the government has decided to introduce a tax on the revenues of certain digital business activities to ensure tax is paid that reflects the value derived from UK users, although it acknowledges the limitations and challenges of revenue based taxes, and recognises the concerns expressed that such taxes do not represent a sustainable long term solution to this issue.
The proposed DST will not be a tax on online sales, nor is it intended to be a generalised tax on businesses that provide digital services, collect data or generate revenue from online advertising. Instead the DST will be a narrowly targeted 2% tax on the UK revenues of digital businesses that are considered to derive significant value from the participation of their users. The tax will apply from April 2020, and be legislated in Finance Bill 2019/20.
The tax will be applied by reference to specific digital business activities, which the government considers derive significant value from users the business activities within scope will be the provision of a social media platform, search engine or online marketplace.
The tax will apply to the revenues generated by these taxable business activities, where those revenues are linked to the participation of a UK user base, and businesses will only become taxable if they generate more than £500m in global annual revenues from in scope business activities, and generate more than £25m from in scope business activities linked to the participation of UK users, but will not pay tax on the first £25m of UK taxable revenues.
There will be a ‘safe harbour’ which will allow businesses to elect to make an alternative calculation of their DST liability, which will be of value to those with very low profit margins.
The tax will be deductible against UK corporation tax under existing principles.
The government will continue to monitor progress in international discussions and will disapply the DST if an appropriate global solution is successfully agreed and implemented.
The legislation enabling the DST will include a clause that requires the tax and the progress in international discussions to be reviewed in 2025. The outcome of that review will then be reported to Parliament.
The consultation seeks views on the detailed design, implementation and administration of the DST and includes proposals on defining the business activities within the scope of the tax, proposals for determining the instances when revenues become taxable, the detailed design of the safe harbour, the effect of the DST being a deductible expense for corporate tax purposes, the review mechanism and the link to the international process, reporting and payment.
Comments on the consultation document have been requested by 28 February 2019.
If you would like further information on the proposed DST, please contact Keith Rushen on 0207 486 2378.