The government is going ahead with the introduction of the Digital Services Tax (DST) from 1 April 2020 as announced at Budget 2018.
The tax will be 2% of revenues that digital businesses earn from the provision of search engines, social media platforms and online market places that are linked to UK users.
The objective of the legislation is to tackle the perceived lack of fairness in the tax systems and to ensure that digital giants pay UK tax based on the value these businesses derive from their interactions with, and the contributions of, an active user base.
It is only intended to affect a small number of very large groups and will apply to those that have global digital revenues in excess of £500 million and there will be a £25 million revenue allowance threshold before the tax applies. Groups with low profit margins can elect to pay the tax on a different basis and there are provisions to restrict the UK tax where a similar tax applies to the same profits in another territory.
The DST adds another layer of complexity and compliance for very large groups. Businesses will pay the DST on an annual basis, via a separate return. A group will nominate an entity to be responsible and if no company is nominated the ultimate parent will be responsible for making the return.
The government remains committed to developing a multilateral solution to the challenges digitalisation has created for the corporate tax system and will repeal the DST once an appropriate global solution is in place. In the meantime, the DST is likely to cause friction in trade talks with the US.
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