The Digital Services Tax
November 27, 2018
The Treasury has announced plans to introduce a Digital Services Tax (“DST”) from April 2020, which it anticipates will raise £1.5 billion over four years.
The introduction of the DST reflects the UK’s discontent with the taxation outcome of certain highly digitalised businesses under the current international tax framework. The view is that the DST will act as a short term solution to the tax challenges of digitalisation while a global consensus-based solution is designed and implemented within the EU, G20 and OECD. Due to its interim nature, the DST will be subject to formal review in 2025.
The DST will apply a 2% tax on the revenues of three specific in-scope digital business models: the provision of a search engine, social media platforms, and online marketplaces. The tax has a broad nexus rule focusing on the location of the user, not the business. This means that the DST will apply to the revenues of both resident and non-resident enterprises, irrespective of their level of physical presence in the UK, whenever they are linked to UK users. However, the DST is intended to target large tech companies only. As a result, only large businesses which generate at least £500m from in-scope business models will be subject to the DST.
The stated intention is for the DST to operate outside the scope of tax treaties. This hints at the view that the DST will not (either as matter of form or substance) be designed as a tax on income or any element of income covered by Article 2 (Taxes Covered) of the OECD Model Tax Convention. By operating outside tax treaties, major non-resident tech companies will be unable to credit the DST charge against income tax imposed by their country of residence.
Compliance with EU law will be required if the transition period proposed in the draft Brexit Withdrawal Agreement is agreed upon. In particular, the DST must be compliant with the fundamental freedoms set out in the TFEU and the prohibition on State aid. It should be noted that the CJEU currently has two requests for a preliminary ruling concerning the application of Hungary’s advertisement tax to Google (C-482/18) and Vodafone (C-75/18). Hungary’s advertisement tax is also a unilateral measure aimed at addressing the tax challenges of certain digitalised businesses (online advertising services) and, like the DST, the scope of Hungary’s advertisement tax is also ultimately dependant on the location of the targeted public.