Digital Service Tax (DST) was first announced in the 2018 Budget. Whilst DST is not yet in force, draft legislation has now been published to be included in the Finance Bill 2019-20 to which royal assent is expected in Spring 2020. If passed into law, DST will apply from 1 April 2020 to profitable high tech companies making sales in the UK.
Obvious targets for DST are the US tech giants such as Amazon, Google, Airbnb and Apple. We have also encountered unexpected examples of circumstances where DST will apply to some of our clients, and we thought that it might be useful if we remind you about DST and what to expect from this new tax.
DST was originally proposed by the European Commission following the growing digitalisation of the EU economies, but the UK will be one of the first jurisdictions to implement this new tax in its domestic legislation. France has already approved (in July this year) a temporary DST which will levy a tax of 3% of turnover of companies with digital business in France that have digital business models and revenues of over €750 million globally and €25 million in France.
In the UK there will be a double threshold to satisfy before DST can apply: a threshold of £25 million annual UK turnover and a £500 million annual turnover worldwide. A 2% charge will apply on the UK revenues of ‘specific digital business models’ that are restricted to search engines, social media platforms and online marketplaces. It is important to note that 2% DST is applicable to revenues rather than profits, as opposed to corporation tax protocols where tax is charged on profits rather than turnover.
In simple words, if a digital business generates over £500 million turnover worldwide, its UK trade will be likely to be within the scope of DST but the first £25 million of its UK sales will be tax exempt.
What about non-UK incorporated companies and/or non-UK resident companies?
The UK has adopted an approach (narrower than that applied in France) whereby the provision of a social media platform, search engine and online marketplace are considered a taxable business activity for DST. Therefore, a non-UK resident company providing digital services to its UK customers who use the company’s services online from the UK will be within the scope of DST in the same way as a UK resident company.
And what about gambling businesses?
We have advised a client on this issue recently and concluded that DST should, in principle, apply to gambling businesses. This follows from the European Commission’s specific clarification that neither online gambling nor gambling companies should be excluded from the legislative framework for DST purposes.
The UK Government has confirmed that it will only apply DST until an appropriate long-term solution (e.g. international agreement) is in place but, unfortunately, we are unable to confirm when or if this will ever happen. This is a difficult ongoing project currently being worked on by the EU/OECD but, assuming that international agreements can eventually be negotiated, DST should be repealed although this may take a long time.
Finally, we have noted the strong adverse US reaction to the French DST. US trade representative Robert Lighthizer has stated that Washington would conduct an investigation into the new French tax as it ‘unfairly targets American companies’. The unilateral move by France to introduce a DST could result in US tariffs on French wine or cars. The potential implications for the UK of the likely US reaction to a UK DST are therefore potentially very serious and, ultimately, may even lead to the abandonment of the tax. In the context of the UK’s imminent exit from the EU it is interesting to note that any future US/UK trade deal would have to be negotiated with Mr Lighthizer.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.