The UK carried through on its pledge to introduce a digital services tax from 1 April 2020, despite pressure from the US Government. This follow-up article looks in depth at the different elements of the regime, including practical compliance considerations for multinationals.
The UK's Digital Services Tax
The UK's digital services tax (DST) is levied on search engines, social media platforms, and online marketplaces' revenues derived from the participation of UK users.
Only the largest digital businesses need pay the tax, with an exemption in place for businesses whose taxable revenues do not exceed $25m. In addition, it applies only to groups whose global revenues from in-scope business activities were $500m or more in an accounting period (generally this will be the period of account of the ultimate parent company of the group).
A group's UK digital services revenues are calculated before any relief for relevant cross-border transactions when testing whether the UK revenue threshold is met.
These thresholds are reduced proportionately where the accounting period is less than 12 months.
Where a group carries out more than one captured activity, the thresholds apply to the total combined revenues of all the digital services activities. The regime applies to business to business, business to consumer, and consumer to consumer activities.
Calculating DST liability
The levy is contrary to conventional taxes in being levied on turnover, rather than profit, and features a 2% rate on revenues from captured UK activities above £25m.
The DST is deductible against UK corporation tax under existing principles but not be creditable. In addition, the regime includes provisions for cross-border relief. If a group makes a claim relating to cross-border relief, the group's total UK DST tax bill will be reduced by 50% of any revenues from relevant cross-border transactions.
Businesses providing the covered services will need to determine how much revenue is directly attributable to interactions with UK consumers. They will need to support their determination that a user is in the UK, or otherwise, by potentially using the following evidence:
- Delivery address;
- Payment details;
- IP address;
- Intended destination of advertising based on contractual evidence; and
- The address of property or location of goods which are rented out.
- A "user" is simply anyone that uses the digital service activity.
Transfer Pricing Considerations
Although the DST regime is separate from UK corporate tax rules, the payment of DST may require alterations to a group's transfer pricing policies. UK guidance states that where there are controlled transactions between associated enterprises in a group, the companies should consider the treatment of the DST charge in arriving at arm's length prices.
Specifically, businesses should consider whether, acting at arm's length, the company that paid and/or is liable to DST would have borne the cost of the DST expense, or whether it would have looked to recover some or all of the expense were it transacting with an unconnected entity. If so, a change to transfer prices may be necessary.
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Despite being a major measure in the international tax area, the levy was introduced with no fanfare from the UK Government. There was speculation as to whether the UK would put its plans on hold, under pressure from the US to shelve its plans, as France did. The US Government is still considering action against various countries for introducing DSTs, which it considers discriminate against US tech giants.
On June 2, 2020, the United States Trade Representative announced the launch of investigations into digital services taxes (DSTs), including the UK's, which may result in retaliatory policies against UK industry.