Philip Hammond has shaken off the concerns expressed by US policy makers, and pressed ahead with plans to introduce a new digital services tax (DST) in the UK, starting in April 2020. This delivers on the Chancellor’s threat to “go it alone” if other governments did not agree to change the myriad of tax agreements determining who gets to tax the profits made by companies operating across borders. The UK argues that the current rules are not fit for purpose in a digital world, where internet businesses rely on the actions of users in the country to enable sales of advertising, or the creation of a market.
Faced with little chance of a change at the international level in the short term, the UK’s new DST will tax, at two per cent, the sales of companies with particular business models, as long as those revenues are linked to customers in the UK. Specifically, the new measure will target the revenues of search engines, social media platforms, and online marketplaces; in a slight departure from the EU model, the tax will not include businesses that sell data. The tax will also not affect other internet-based business models, such as financial and payment services, the provision of online content, sales of software or hardware, and broadcasting services.
This will only apply to businesses whose global sales exceed £500 million, excluding not only small business but also large businesses that are just starting out providing, for example, an e-marketplace. Additionally, the first £25m of UK revenues would not be taxable.
Even with this close targeting, however, Hammond predicts to generate tax receipts over £400m every year by 2023 – implicitly assuming that sales of over £20 billion per annum will arise in the UK by then.
In addition to the targeting, the Chancellor has sought to soften the blow on businesses with low profits – a core complaint against any turnover tax. We didn’t get much detail in the budget announcements, but Hammond promised there will be a consultation on how to make sure that loss-makers will not have to pay the DST, and that those with very low profit margins will pay only a reduced rate. In delivering this, the Chancellor may be relying on the extra flexibility he will have to design the tax once the UK is no longer governed by the rules of the EU.
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At the heart of Hammond's new tax is the core belief that the UK isn’t getting its fair share of tax rights over the profits of digital giants. This will inevitably result in those companies' revenues being taxed twice, once as turnover in the UK and then again as profits elsewhere. Hammond made no apology for that, even if he noted that he will “disapply the DST if an appropriate international solution” is put in place. He is clearly skeptical that this will happen soon, as he has included a review of the DST regime in 2025.
With the UK now having set out its stall, the key question is what other countries will do. We can expect this to put more pressure on the EU to come forward with its own version, or risk its member states coming out with their own, outside of the Commission’s direction. We can also expect other jurisdictions to closely watch the developments – we saw Australia follow the UK in implementing a Diverted Profits Tax, and it has already issued a consultation on this issue. The US and China, being home to many of the companies that may end up paying the tax, will certainly be paying attention too.
An even more important question is: how will business react? Will the tax be sufficiently certain for businesses to clearly know when they are affected? Will those in scope be able to work out how much it will cost to have UK users? Will that cost be low enough, and the protections for small margin and loss makers mean that businesses are not deterred from servicing the UK? Hammond is hoping that the answer to all these questions will be “yes”. From a consumer perspective, the other question is whether this tax will somehow be reflected in the prices that we pay. As for that, only time will tell.
Chris Sanger is Head of Tax Policy at accounting firm EY
This article was originally published by WIRED UK
