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UK 'should postpone digital tax plans' until international consensus reached

The UK government should not proceed with its plan to introduce a digital services tax in April 2020 and should instead wait for international consensus on the issue, according to Pinsent Masons, the law firm behind Out-law.com.14 Mar 2019

The firm was responding to the UK government's consultation on the design of its new digital services tax (DST) which closed at the end of February. It said the government should wait for the Organisation for Economic Cooperation and Development (OECD) to come up with a plan for global reform of the international tax system.

The consultation document asked for views on implementation of the proposal for a 2% tax on the UK revenues of providers of social media platforms, search engines and online marketplaces.

Under the proposals online marketplaces will not be subject to DST on the revenues from selling their own goods online. In addition, DST will not catch revenues generated from the direct sale of online content such as TV or music subscription services or online newspapers, where the business either owns the content or has acquired the right to distribute content.

The consultation document makes it clear that DST is intended to be a temporary measure and that the government will monitor progress in international discussions and will disapply DST "if an appropriate global solution is successfully agreed and implemented".

Pinsent Masons said that DST should not be introduced unilaterally, even on a temporary basis as there is a risk of uncertainty and double taxation if countries such as the UK take un-coordinated and unilateral action to tax digital services.

Since the UK consultation document was first published, the OECD has published a public consultation on its efforts to reform the international tax system. It intends to reach a solution by the end of 2020 that could be implemented quickly by individual countries.

With the DST not due to be introduced until April 2020, Pinsent Masons suggests that it should be postponed as it would have minimum impact before it was replaced by international measures.

DST is designed to tax the revenues of a narrow class of businesses which are considered to derive significant value from the participation of their users.

One of the issues considered in the UK consultation is how 'user contribution' can be defined. Allowing the OECD further time to reach international agreement on a way forward would enable the UK to benefit from the OECD's efforts to explore the concept of user contribution, Pinsent Masons said in its consultation response.  

Pinsent Masons also highlighted the significant compliance burden that DST would create for affected businesses, which may have to invest substantial resources into developing systems to capture the data to enable the business to assess whether it is within the scope of the tax.

User participation is one of three proposals that the OECD is considering as a way to change the rules for international profit allocation. The other proposals being considered are to attribute a value to marketing intangibles or to allocate profits on the basis of a significant economic presence. Unlike user participation which would only apply to a certain type of business, these other proposals would have a much wider application.

The OECD consultation also asks for views on two inter-rated proposals to address global anti-base erosion. These are an income inclusion rule, which would tax the income of a foreign branch or controlled entity if it was subject to a low effective tax rate in the foreign jurisdiction; and a tax on base eroding payments, which would deny deductions or treaty relief for certain payments unless they were subject to tax above a minimum rate.

A number of other countries are also introducing unilateral measures to tax the digital economy.

Earlier this month France announced it would be introducing a 3% tax on revenues deemed to have been generated in France by digital companies where the user is essential for the creation of value. The tax will catch advertising revenues from services that rely on data collected from internet users, revenues from the provision of a linking service between internet users and the sale of user data for advertising purposes.

Italy, Spain and Austria are also proceeding with unilateral measures for a 3% tax and New Zealand is consulting on measures aimed at digital services companies.

Meanwhile EU finance ministers agreed earlier this week not to proceed, for now, with an EU proposal for a wide ranging tax on the revenues of digital companies, which stalled last year in the face of opposition from countries including Ireland, Sweden and Denmark.