On November 7, 2018, U.K. HMRC initiated a Digital Services Tax Consultation. The U.K. intends to introduce a digital services tax (DST), which will apply to relevant revenues received in accounting periods ending on or after April 1, 2020. The DST is intended to be a temporary tax, which will be replaced once a comprehensive global solution is reached.
The DST would apply to the following business models:
- Provision of a social media platform: the volume and quality of user-generated content will be a key factor in generating revenues. A social media platform could generate revenues through online advertising, subscription fees, or sales of data, all which would be in scope of the DST.
- Provision of a search engine: a key driver of revenue will often be advertising based on data provided by the user.
- Provision of an online marketplace: businesses will often encourage users to play a role in regulating the quality of goods and services provided on the platform. An online marketplace could generate revenue through commission, subscription fees, delivery fees, or online advertising revenues, all of which would be in scope of the DST.
The DST would apply to third-party revenues that are generated from in-scope business activities. It is irrelevant whether these third-party revenues are realized in a U.K. or non- U.K. entity, or in single versus multiple entities. Where in-scope activities are integrated with out-of-scope activities, the U.K. proposes that businesses must apportion revenues between in and out-of-scope business activities.
The DST is intended to apply only to specific business activities, which derive significant value from user participation. Revenue derived from the following activities would not be in scope of the DST:
- Provision of financial or payment services – these activities are not considered to derive significant value from user participation and are often subject to unique tax and regulatory regimes.
- Sale of own goods online – the tax is not intended to capture revenues derived from the sale of own goods online, either through a seller’s own website or through a marketplace. It will apply only to the revenues generated by the marketplace from facilitating such sales. This category would also include the provision of hardware, software, and cloud computing.
- Provision of online content – the government does not intend to apply the DST to revenues generated from the direct sale of online content (e.g. TV or music subscription services, online newspapers, etc.), where the business either owns the content or has acquired the right to distribute content.
- Provision of radio and television broadcasting services.
The DST would be a 2% tax on U.K. gross revenues (net of VAT) of digital businesses that derive significant value from the participation of U.K. users. The U.K. recognizes that other countries may introduce a similar tax, which may lead to double taxation. In those circumstances, the government would negotiate an appropriate division of taxing rights with other countries that are also implementing a DST.
The tax will be legislated in Finance Bill 2019-20. A business will only become taxable if it generates more than £500 million in global annual revenues from in-scope business activities and generates more than £25 million in annual revenues from in-scope business activities linked to the participation of U.K. users. Businesses will not have to pay tax on their first £25 million of U.K. taxable revenues.
The DST would include a safe harbor, which will allow businesses to elect to make an alternative calculation of their DST liability. This is intended to accommodate only those with very low profit margins or making losses. The tax would be deductible against U.K. Corporation Tax, but would not be creditable. The DST would include a clause that requires review of the tax in 2025.
Comments to the consultation are requested by February 28, 2019.
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