UK to go ahead with digital tax from April 2020

The new tax will apply from April 2020 to businesses whose global revenues from in-scope business activities are greater than £500 million and where more than £25m of these revenues are derived from UK users.

There had been calls for the government to hold off implementing the new tax in the light of moves by the Organisation for Economic Cooperation and Development (OECD) to achieve international consensus on reforms of the international tax system to deal with the digitalised economy.

"It is disappointing that the UK is pushing ahead with DST and is not waiting for the OECD to come up with an internationally agreed solution," said Eloise Walker, a tax expert at Pinsent Masons, the law firm behind Out-Law. "Unilateral taxes mean uncertainty and increased administration costs for businesses which will have to apply different rules in different countries and may end up being taxed twice, or more than twice once different unilateral measures are in play on the same profits."

In a response to a consultation which took place earlier this year on the new tax, the government said that although the "most sustainable" long-term solution to the tax challenges arising from digitalisation is reform of the international corporate tax rules, it is going ahead with DST as an interim measure since agreeing and implementing a detailed global solution will take time. It has, however, confirmed it is committed to disapplying the DST once an "appropriate international solution" is in place, which it said would need to lead to a greater allocation of profit of highly digitalised businesses to the countries in which their users are located.

As a number of other countries are also introducing digital services taxes, the government has proposed to alleviate double taxation by only taxing 50% of the revenues arising directly as a result of transactions where one of the users is located in a country which also has a DST that applies to marketplace transactions.

There will also be a new financial and payment services exemption as some of the consultation respondents raised circumstances where some financial services potentially overlap with the marketplace definition. This will mean that a regulated activity which primarily involves facilitation of the trading or creation of financial assets will not be considered an online marketplace for DST purposes.

Changes to the mechanism for paying the tax have also been announced. It will be payable on an annual basis, rather than in quarterly instalment payments, as had previously been proposed. It can also be calculated and reported at group level in order to simplify administration.

As well as publishing the draft legislation, the government has also published draft guidance for consultation. The guidance gives more details of which activities will be caught by the new tax and how businesses should calculate their potential exposure.

"The guidance glosses over many of the practical issues, such as working out which users are UK users," Walker said. "Businesses will be left to make a judgement as to whether it is reasonable to assume a person is normally located or established in the UK, based on the information available to them. Because the ambit of the rules is so unclear many businesses will be forced to go through costly compliance exercises, even though no actual additional tax is payable."

This week, France's Senate voted through plans to introduce a digital services tax. The 3% tax will apply to revenues deemed to have been generated in France by digital companies, wherever they are established, which make annual supplies of taxable services of more than €25 million in France and €750m worldwide. The tax, which was announced in December last year, will be backdated to 1 January 2019 with the first payment due in October 2019.

The French tax will be applied to advertising revenues from services that rely on data collected from internet users, revenues from the provision of a linking service between internet users and the sale of user data for advertising purposes.

US trade representative Robert Lighthizer has announced his intention to investigate whether the French proposal "unfairly targets American companies".

"It seems likely that the US will also have a problem with the UK's new tax, as many of the businesses affected will be US multinationals," Walker said.