FB 2019/20 – April 2020 introduction of the Digital Services Tax

Wed 17 Jul 2019

FB 2019/20 – Digital Services Tax

Draft legislation, explanatory notes and guidance have been released for the UK’s 2% digital services tax due to come into force from 1 April 2020.  The consultation on these draft documents will run until 5 September 2019.  Please let National Tax know of any points you have in response to the consultation.

The UK tax will be 2% of in-scope revenues from social media platforms, search engines and online marketplaces above a £25m threshold and will be payable annually.  The tax is projected to raise £400m in 2021/22.  Some further notes on both the UK digital service taxes and the corresponding French tax are covered below.

Potentially affected business should now be considering the possible impact of the new tax, the procedures and IT systems required to identify the relevant users and in-scope revenue (and any apportionments required), and the systems in place to administer the tax.

Please get in touch with a member of the Mazars international tax or indirect tax teams for a further advice.

The French DST

It might be relevant to note that France’s Senate approved its 3% digital services tax on 11 July.  This will apply to digital companies with revenues exceeding €750m, of which at least €25m is generated in France.  It will apply retroactively from early 2019.  The tax is projected to raise €400m this year.

The US has reacted strongly to this news and has initiated an investigation into whether the French tax is an unfair trade practice.  No announcement has yet been made on the UK proposals.

Further detail on the UK tax

The draft legislation issued on 11 July is not exhaustive, and updated legislation and guidance will be issued following consultation.  The main points in relation to this new tax are:

• It will apply to groups with worldwide revenues from a relevant business activity (social media platforms, search engines or online market places) exceeding £500m where more than £25m of those revenues are attributable to UK users.
• An online market place is excluded from scope if it is provided by a financial services provider and more than half its online marketplace revenues arise in connection with the provider’s facilitation of the trading or creation of financial assets. Financial assets has the same meaning as for applicable accounting standards, but also includes an insurance contract.
• It will apply whether the group otherwise has a UK taxable presence or not.  A UK user is defined as a person normally located or established in the UK.
• The tax rate is 2% of UK revenues above £25m, though there is the option to use an alternative calculation based on profit attributable to the UK.  The optional alternative calculation will apply per type of business activity, and can be made separately for each of the three in-scope business activities.  Group revenues will be defined by acceptable GAAP (UK, US or IAS GAAP).
• Revenue derived from the in-scope business activity via advertising will be from advertising intended to be viewed by UK users.  Revenue from users on an online market place will be the total amount of revenues where a UK user is a party to the transaction or is in connection with the sale of an interest in UK land or the provision of UK accommodation. For an online market place where in-scope revenues arise from a transaction where the other party is a ‘foreign user’ and all or part of the revenues are subject to a similar DST in that jurisdiction, the revenue is halved for determining the amount of tax due (a similar adjustment to the alternative calculation covering expenses also applies).

The tax is payable 9 months after the end of the accounting period.  It will be deductible against any charge to corporation tax, but not otherwise creditable against other UK taxes.  A group can nominate a company to file a return (otherwise it will be the parent of the group) and pay the tax, although each company that was a member of the group is liable for this tax.  There is a duty to notify HMRC within 90 days of the end of the accounting period in which the thresholds are exceeded. A DST return must be filed within 12 months of the end of the accounting period