The UK has issued its consultation on a new Digital Services Tax, with more details on the design principles announced at the Autumn Budget.
Following the Chancellor’s announcement in the Autumn Budget, the Government published its consultation on a new Digital Services Tax (DST) on 7 November 2018. The consultation document reiterates the UK’s commitment that the DST should be “proportionate, narrowly-targeted, and…ultimately a temporary tax, to be replaced by a comprehensive global solution”. The consultation expands on a number of the design principles outlined during the Budget, including details of some in- and out-of-scope business models, but there remain a number of grey areas which will no doubt be discussed in more detail throughout the consultation period and beyond.
The consultation document expands on the types of business models intended to fall within the scope of the tax, namely the provision of a social media platform, search engine or online marketplace, where significant value is derived from the user base of the business. The document also reiterates that revenues from many digital and online business models will not be within scope of the tax, including online retail, the provision of financial or payment processing services, and the provision of online content (including broadcasting).
As stated during the Budget, the Government’s intention is to charge the DST at 2 percent of revenues from in-scope businesses, subject to de minimis levels of both global and UK sales (£500 million and £25 million, respectively). The consultation document also expands on the alternative ‘safe harbour’ method of calculation, which may be elected into by loss-making and low-margin businesses. Although the proposed ‘safe harbour’ methodology would lead to no DST being charged on loss-making business models, the proposed method of calculation could lead to businesses with very low margins paying DST at an effective rate of around 80 percent of their profit margin in the UK.
The document clarifies that cross-border transactions, where only one user is located in the UK, are expected to fall within scope of the tax (with a negotiated division of taxing rights if the counterparty country also levies a DST), and reaffirms that the Government does not expect DST to fall within the scope of the UK’s existing tax treaties. Although the DST will not be part of the corporation tax regime, the Government’s current intention is to align payment and reporting deadlines with corporation tax, that is, through annual reporting and quarterly instalment payments. The consultation document invites stakeholder views on a number of questions.
The consultation period will run until 28 February 2019, and potentially impacted businesses may wish to submit representations prior to this date. To discuss the proposals in more detail, please contact Matthew Herrington and Jennifer Cooper.