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The DST levies a 2% tax on UK revenues exceeding £25 million that are derived by search engines, social media platforms and online marketplaces from providing certain services linked to UK users.
There has been much public criticism of technology giants such as Facebook and Google in the last few years for not paying their fair share of tax in the UK (and across the EU) relative to their substantial UK-derived revenue and profits. The government clearly shares these concerns and the DST is an attempt to address them. It will inevitably result in these companies' revenues being taxed twice, once as turnover in the UK and then as profits elsewhere. By levying the DST, the government appears to think this is something these companies can afford to do. The DST will target established tech giants rather than start-ups. It will only apply to businesses that generate at least £500 million globally from such services. This is in line with the government's intention that the DST be "narrowly-targeted and proportionate".
The government will issue a consultation in the coming weeks to set out the design of the DST in more detail. In the meantime, limited information has been published:
- Revenues that will be subject to the DST include (i) advertising revenues generated by social media platforms from targeting adverts at UK users (ii) advertising revenues generated by search engines from displaying advertising against search terms inputted by UK users and (iii) commission generated by online marketplaces by facilitating a transaction between UK users;
- The DST is not a tax on online sales of goods nor is it a generalised tax on online advertising or the collection of data;
- The DST will be an allowable expense for corporate tax purposes under ordinary principles only. It will not be a creditable tax for corporate tax purposes;
- The DST will not apply to financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services.
Importantly, and in contrast to the European Commission's proposed DST, there will be a safe harbour allowing loss-making businesses to not pay the tax and those with very low profit margins to pay a reduced rate of tax. This approach may make the DST more palatable to the US and China where many of the targeted businesses are headquartered. Some EU countries are known to favour such an approach, which runs against the European Commission's direction.
The DST is an interim measure intended to act as a stop-gap pending reform of the international corporate tax framework for digital businesses. Discussions are ongoing in the EU, G20 and OECD to reach international agreement. The DST will be reviewed in 2025 and dis-applied sooner if an international solution is put in place before then. It is expected that the DST will raise around £400 million annually and £1.5 billion over 4 years.
It will be interesting to see the details of the government's consultation on the DST's design. Businesses will certainly be keen to understand how revenues generated from the services within the scope of the DST will be allocated to the UK and how the link to UK users will operate. The government needs to strike a delicate balance – the tax must be sufficiently certain so that those that are in scope can work out when they are affected and what it will cost them but the cost should not be so prohibitive that it deters businesses from servicing the UK. Time will tell how the DST will play out in practice.
Co-authored by Dominic Tyler.