The UK will be one of a handful of European countries to introduce a tax on digital firms' activities that currently fall outside the tax net.
A tax on digital services had been proposed at EU level but EU States failed to reach a consensus on the proposal. It would have involved the introduction of a tax, featuring a 3% rate, on large multinationals that receive significant income from certain digital activities – namely, from online advertising, certain intermediary services, and the monetisation of user data.
A handful of member states, including France, Spain, and the Czech Republic, have decided to go it alone in introducing their own digital services taxes. While the Czech Republic has decided on a 7% levy that tops the scale, the UK has decided to undercut the EU's original proposal by proposing a levy with a 2% rate. Its levy would be introduced from April 2020.
Plans to introduce the levy were confirmed in the 2019 Budget. The Government has proposed that the tax will apply to revenue generated by search engines, social media platforms, and online marketplaces that are linked to the participation of UK users. It will apply only to groups that generate global revenues from in-scope business activities in excess of GBP500m per year. Businesses will not have to pay tax on their first GBP25 million of UK taxable revenues.
The regime will include a safe harbour provision that will exempt loss-making businesses as well as provisions that will reduce the effective rate of tax on businesses with very low-profit margins.
It is proposed that the tax will be deductible against UK corporation tax under existing principles, but it will not be creditable. Legislation to introduce the new tax will be included in the next Finance Bill.
The UK's new digital services tax is intended to be a temporary measure. The Organisation for Economic Cooperation and Development has been tasked by the international community with putting forward a new blueprint for international adoption that will respond to the tax challenges of the digital economy.
The UK Government has specifically said that it intends to monitor progress in international discussions and said it will "dis-apply the digital services tax if an appropriate global solution is successfully agreed and implemented."
The steering committee of the BEPS Inclusive Framework, with the support of the Task Force on the Digital Economy, is expected to submit an interim report for all members of the BEPS Inclusive Framework by June 2019. Thereafter, the proposals will be forwarded to G20 finance ministers. The OECD will aim to achieve a final consensus on new digital tax rules in 2020.
The UK Government has committed to include a clause in the relevant legislation providing for a review of the digital services tax if it is still in place in 2025.
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Prior to implementation, businesses will need to set up procedures to properly record taxable transactions. Businesses will be required to make payments of the new digital services tax quarterly in line with the payment schedule for Very Large Corporate Quarterly Instalment Payments. Instalment payments will be due on the 14th day of the third, sixth, ninth, and twelfth month of the group's UK accounting period.
Payment dates will be adjusted where the accounting period is less than 12 months and will follow the arrangements for corporate tax, the UK Government has said.
Under the current proposals, a single company within a group will be nominated to report the group's UK digital services tax liability and comply with all UK obligations.
While the UK's levy is intended to be temporary, the OECD has been handed an enormous task in proposing a workable redraft of current international tax law, which has failed to keep pace with digitalisation.
2020, the year in which the digital services tax will be introduced, will see a flurry of activity from policymakers internationally in this area. How successful these international negotiations are will determine the lifespan of the UK's digital services tax.
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