All About the New Digital Services Tax to Be Levied by The UK Government

Her Majesty’s Department of Revenue and Customs, in a press release issued on 11^th March 2020,  announced that the government of the United Kingdom would be going ahead to levy a new digital services tax on the revenue derived from the provision of a social media service, a search engine or an online marketplace in the UK. Though the announcement did not make a part of Rishi Sunak’s budget speech on the same day, which focused on actions being taken to fight the Coronavirus outbreak, it was confirmed by the government that the Digital Services Tax would be introduced as on 1^st April 2020.

In a move, that is expected to have a significant impact on the US based tech giants such as Facebook, Google and Amazon, and hence, is also likely to impact the potential Transatlantic Trade and Investment Partnership (TTIP) between the United Kingdom and the United States of America. The United States previously threatened to impose heavy tariffs on French goods coming into the United States of America to counter a similar tax from the French authorities, which was later deferred. This current tax from the UK is expected to be countered by a similar stance from their American Counterparts.

In this scenario, let us first look at the current trade relations between the US and UK and what would be the impact of the potential deal that is already in the books.

Current Scenario of Trade for the UK

As per the office of the US Trade representative, currently, UK is the 7^th biggest goods trading partner of US with the trade for both sides amounting to US $127.1 billion. A potential trade deal could reportedly see an increase of approximately 40 per cent to this figure by the end of 2023.

Experts have also highlighted the potential impact of such a deal with the US, without having a deal with the European Union to fall back on. Some reports have suggested that compared with the fact that the TTIP would only add about 0.16 per cent to the UK’s economy over a period of next 15 years, a failure to agree any trade deal with the European Union would result a contraction of the economy by 7.6 per cent as compared to the current trade policies of the UK, over the same 15 years period.

The UK obviously wants to be in trade with both EU and the USA after the transition period is over, and a free trade agreement (FTA) would be an ideal scenario, but the challenges to achieve such a situation are too many and there are currently many roadblock in the way, some of which have been mentioned above.

The four main factors that will define the future trade deal of the UK with the USA includes British Health Norms and Standards, Regulations, Geopolitical Strategies and the Digital Services Tax, that has now been approved, as stated above.

For further information on the other three factors, Â read.

The Digital Services Tax and its importance for the UK

The Digital Services tax would apply to all companies who are working in the provision of either social media services in the UK or run search engines and online marketplaces but generate revenues through their user customers based in the UK. It is important to understand that these companies generate revenue, profits as well as value by engaging and interacting with the customers based in the UK, which has given birth to a separate digital economy. This digital economy has led to a misalignment, in geographic terms, as these firms might earn their profits in a specific country, while pay tax in the others. As per Her Majesty’s Revenue and Customs (HMRC) department, the value that these businesses derive from its users, doesn’t take into account the geographic presence of these users or the location of such profit generation. The said tax is being introduced and confirms to put such practices in place, where, if a UK user is a point of profit generation for a digital service company, by the provision of some of its services, then they will be expected to pay the tax at 2 per cent of its total revenues.

The imposition of this tax is important because this will allow the UK government to collect more tax from companies that are providing services in the UK to UK based users and making profits out of this situation.

The tax will apply to all businesses regardless of whether they have an existing UK taxable presence. A business will only be subject to the tax when it exceeds two thresholds:

• £500 million global revenues from a business activity in the scope of the tax
• £25 million revenues from a business activity in the scope of the tax, where those revenues are linked to the participation of UK users.

In a policy costing statement, that was laid out along with the Budget in 2018 estimated the impact of such a tax to the exchequer. It was, at the time established that the exchequer would receive about £440 million in digital services tax by the end of 2023-2024. The tax base was established by collecting data on the revenues generated by the specific digital business activities in the scope of the measure.

In the policy statement laid out along with the current budget by Rishi Sunak, it was established that by the end of 2024-2025, the total exchequer impact would stand at a value of £70.00 million. This decrease was due to the uncertainties in the costing related to the size of the tax base, as it was difficult to estimate the companies that will continue to operate in the UK, post the beginning of the transition period for the UK’s exit of the EU and no trade deal in place at the current moment.

Scope of the Tax

The Digital Services Tax, which is slated to start from April 2020, will have the provision of a social media services, online marketplace services by a group including the carrying of any associated online advertising services in the United Kingdom or internet search engine services provision, in its scope. This will impact the biggest tech companies in the world such as Google, Facebook, Twitter and Amazon. A lot of people expect that it would also have a significant impact on the operations of Apple in the United Kingdom, but it might not, as a major chunk of Apple’s revenue in the United Kingdom comes from the sale of its devices and not the digital and social media services it provides, though it is also planning to expand its businesses there with the start of its streaming service Apple TV Plus.