The government will be consulting on the design of the new tax in the coming weeks, to ensure that it "operates as intended and that it does not place unreasonable burdens on businesses". It intends to tax search engines, social media platforms and online marketplaces at a rate of 2% on their UK revenue, to reflect the value they derive from the participation of users in the UK.
Chancellor Philip Hammond said in his Budget speech that the tax would be "narrowly targeted" at "established tech giants" rather than small start-up firms. He said that although the UK remained committed to working with the OECD on an international solution, progress had been "painfully slow".
According to a briefing document published by the government, the UK DST would be abolished "when an appropriate international solution is in place". The model will also include a review clause committing the government to a formal review of the tax if still in force in 2025, "to ensure it is still required following further international discussions".
Corporate tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said that it would "come as no surprise" that the UK government was pressing ahead with the policy given the lack of international progress. However, "many will be disappointed to see the rate set at 2% of revenue - a potentially eye-watering figure for the large US multi-nationals at which this is targeted", she said.
"One might also wonder just how 'interim' these proposals will be in practice and what criteria HMRC will apply to determine if the OECD's version - if it ever gets off the ground - is an 'appropriate international solution'," she said.
"The news isn't as bad as it could be. HMRC has listened to businesses worried by the ambit of the original proposals and is looking to insert certain protections - such as a £25 million de minimis threshold, and focusing squarely on limiting the scope of the tax to just the three key target areas. But there will still be concerns on exactly how the revenues from the target areas are to be split out from other income, and how the 'safe harbour' alternative calculation is supposed to work," she said.
According to the briefing paper, the DST will be applied to revenue attributable to one of the three in-scope business models, whenever those activities are linked to UK users. For example, the government would apply a 2% tax to revenue generated by a social media platform from targeting adverts at UK users; to commissions generated by digital marketplaces for facilitating transactions between UK users; and on revenue generated from display advertising shown to UK users when they input search terms into search engines.
The government is proposing a 'double threshold' to ensure that the tax is "narrowly-targeted, proportionate and ultimately temporary". Businesses would only be taxable once they generate at least £500m globally from the three in-scope business models, while the first £25m of relevant UK revenue would not be taxable. A 'safe harbour', which will be set out in the consultation, would allow businesses with very low profit margins to calculate their liability on an alternative basis.
The Organisation for Economic Cooperation and Development (OECD), which coordinates global tax policy, has said that it will try to come up with an agreed approach to taxing the digital economy by 2020. It published an interim report on the tax challenges arising from digitalisation in March 2018, but did not make any recommendations because there is as yet no consensus between OECD member countries on whether a tax response is necessary and, if so, how it should be implemented.