The UK government remains committed to reform of the international corporate tax framework for digital businesses. The OECD and G20 did not reach global consensus yet, therefore on 29 October, UK took the initiative to introduce a two percent digital services tax (DST). The tax is expected to raise £1.5 billion over four years and would come into effect in April 2020.
The DST applies a 2 percent tax on the revenues of specific digital business models where their revenues are linked the participation of UK users. The tax will apply to business models that derive significant value from the participation of their users such as: search engines; social media platforms; and online marketplaces. These are the following example how DST will apply to each business models:
Apart from those business models, Brick-and-mortar retailers, financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services will not be in the scope of the DST. A further exemption would be made after consultation takes place.
The government set up the double threshold to determine taxable entity for DST. The business entity needs to generate revenues of at least £500m globally and more than £25m of the revenue generated from UK users. Additionally, safe harbour provisions are also added to help businesses with the low profit margin. In this provision, companies can elect to calculate their liability on an alternative basis. As a result, those making losses under this calculation will not have to pay the DST and those with very low profit margins will pay a reduced rate of tax.
The DST is subject to review clause under which it will be formally reviewed in 2025 to evaluate whether it is still necessary after further global discussions on long-term answers. The government will dis-apply the DST if an appropriate international solution is in place prior to 2025.
The UK plan for digital tax differs from EU’s blueprint. According to the EU proposal, a higher rate of 3 percent would be levied on activities involving high user participation. Additionally, a company would need to make €750 million in global revenues to be subject to the tax, €50 million of which would need to be EU taxable revenue. The blueprint itself is under negotiation since Ireland, Finland, Sweden, and the Czech Republic have banded together with the blueprint due to breach on international treaty obligations and double taxation allegation issues.
The United Kingdom joins Spain, which recently announced its initiative by introducing a 3 percent DST that would apply to companies with annual worldwide turnover greater than €750 million and Spanish sales exceeding €3 million.
One of TPA’s technology partners Cygnet Infotech has developed a comprehensive VAT solution named R7VAT MTD, which is amongst others recently approved by HMRC for use by companies in the UK to automate and manage their VAT returns filing process but can also be used broadly within the EU.
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