The UK tax authorities on July 11 published draft legislation and draft guidance for a digital services tax (DST) to become effective April 1, 2020. These are available for public consultation until September 5, 2019.
The DST is expected to apply by default at 2% of deemed UK revenues derived in excess of £25m, where the group's total global revenues from in-scope activities exceed £500m. Revenues are considered from in-scope activities if derived in connection with providing users with search engine, online marketplace, or social media services, and include revenues from associated advertising businesses. Thus, UK revenues in scope are those linked to UK users but may not be derived from UK sources, and businesses conducting in-scope activities may need to perform complex allocations.
The DST is a novel tax that calls for businesses to analyze where they digitally interact with other businesses and individuals, not just about where they have physical presence or financial relationships. Businesses that do not consider themselves a social media platform, search engine, or online marketplace may undertake some in-scope activities, and therefore will need to consider these rules to seek to be compliant.
The UK has made clear that it intends to introduce the DST and retain it until an acceptable international agreement is reached on reforming the international corporate tax rules (see our bulletin on this here).