Digital service tax is coming – UK and EU developments

Thu 13 Dec 2018

This note provides an update on the development of digital services taxes in the UK and developments in this area in the EU and US.

For a further discussion of the issues around taxation of the digital economy, please get in touch with a member of the Mazars international tax team.

UK developments

There is currently UK consultation on the introduction of a UK digital service tax from 1 April 2020. DST will apply to “relevant” digital activities that derive significant value from “UK users”.  Three digital activities  are specified, each with a proposed definition:

• Social media platforms
• Search engines
• On-line market places

The tax will only apply to businesses with global revenues exceeding £500m, which generate more than £25m annual revenues from in scope business activities linked to the participation of UK users. It will only apply to ‘UK related revenues’ exceeding the £25m threshold.

There will be a ‘safe-harbour’ that will allow businesses to elect instead to calculate the tax based on a percentage (80% is suggested) of profit margin, with the intention that this will protect those businesses with very low profit margins or that are loss making.

It is proposed that a UK user will include an individual, company or any other legal person participating in in-scope activities. A UK user will be someone normally resident in the UK and therefore primarily located in the UK when participating in the relevant business activity.  As most business models depend on knowledge of the location of ‘users’, the government expects that the business should be able to identify the relevant proportion of UK revenues.  In difficult cases it will expect them to make a just and reasonable apportionment.

The DST rate will be 2%, and to avoid distorting operating structures, taxable revenues will be in scope, whether undertaken by an incorporated or unincorporated business. It is proposed there will be an annual reporting obligation and quarterly payments of DST in line with the payment deadlines for very large businesses (i.e. all quarterly payments to be made within the accounting period. There will also be a review clause to assess the continuing relevance of the tax, with the first review date in 2025.

As a reminder of other UK initiatives in this area, there will be income tax on UK revenues received offshore and generated in respect intangible property from 6 April 2019. Schedule 3 of Finance Bill 2018/19 imposes an income tax charge from 6 April 2019 on offshore receipts of entities in low tax jurisdictions where those receipts are in respect of UK derived amounts. It does not apply in certain circumstances, one of which is where the offshore entity is located in a ‘full treaty territory’ – one which has a double tax treaty with the UK that contains a non-discrimination clause. UK derived amounts are:

• Amounts in respect of the enjoyment or exercise of rights that constitute intangible property and
• Enjoyment or exercise of those rights enables, facilitate or promotes ‘UK sales’ (directly or indirectly).

UK sales for this purpose are sales of goods, services or other property either provided in the UK or provided to persons in the UK.

To determine whether something is within the scope of the measure taking effect from 6 April 2019, one needs to consider the definition of ‘intangible property’. This is defined by including any property, but excluding certain things such as: tangible property, an estate, interest or right in or over land; a right in respect of either of these two items; a financial asset, a share or other right in a company; any property of a prescribed description (prescribed in regulations). This has the potential to include a wide range of matters within the scope of the new legislation and it may be necessary (as provided in the draft legislation) to provide a notification to HMRC that the activities are carried on in such a way that no tax is due.

EU developments

At the 4 December 2018 meeting of the European Economic and Financial Affairs Council, the reports on discussions concerning the digital services tax indicated that while agreement has not been reached amongst EU member states, the technical discussion is at a stage where the Council is urging ministers to take a stance on the tax.

A compromise text was put forward  refining the EU proposals to target revenues from:

• Placing targeted advertising on a digital interface;
• Making available a multi-sided digital interface to users;
• Sale of data about users collected from users’ activities on a digital interface.

Despite there being a number of proposed exclusions from the above, a number of jurisdictions still object to them. An alternative proposal put forward by France & Germany (a joint declaration) suggested the digital services tax should be focused on revenues from advertising. The joint declaration suggests that a directive should be agreed upon before March 2019 and implemented by  1 January 2021, and that it should not prevent member states introducing their own measures.

The OECD tax report to the G20 leaders meeting in Buenos Aires from 30 November to 1 December indicated the US has agreed to engage in the search for a global solution to tax issues created by the digital economy.  The task force on the digital economy will meet in December, with further meetings scheduled in 2019 to develop a long term solution to be presented at the next summit meeting.