7 November 2018
In early October the Australian Treasury released a discussion paper on the digital economy. The paper concluded that an international solution was many years away.
The pressure (or perhaps air cover) for our new Treasurer to introduce a new interim measure has ratcheted up with the UK Chancellor announcing that while the UK Government remains committed to the "reform" of the international corporate tax framework in relation to the digitized economy it will impose a temporary turnover tax on certain digital business models with significant UK users.
The proposed DST will apply a 2% tax on the revenues of "specific digital business models where their revenues are linked to the participation of UK users" from April 2020. The tax will apply to:
- search engines generating revenues from displaying advertising against the result of key search terms inputted by UK users;
- social media platforms generating revenues from targeting adverts at UK users; and
- online marketplaces generating commissions by facilitating a transaction between UK users.
Financial and payment services, the provision of online content, sales of software/hardware and television/broadcasting services will not be in the scope of the DST.
The DST will include the following features:
- a double threshold: this means it will only apply to business that generate revenues from in scope business models of at least GBP500m annually and the first GBP25m are not taxable;
- a safe harbour as to how businesses can calculate their liability on an alternative basis so that those making losses under this calculation will not have to pay DST; and
- a review clause, so that the tax will be subject to review in 2025 and cease to apply if an "appropriate international solution" comes into place prior to 2025.
Questions that will need to be addressed include:
- Who is a UK user? Will it be based on user location or via a UK IP address? What if there is limited user tracking by the company? What are the privacy issues in retaining this data to enable an audit by the UK HMRC and will this conflict with privacy protections in the EU General Data Protection Regulation?
- How will profit be calculated? Is it "profit" of the entire enterprise or just the UK operations? For example, would the DST apply if the Uber UK operations are profitable but the company as a whole is still running at a loss.
- How are foreign head office expenses taken into account?
- The use of the wording "business models" implies that it is focussed only the relevant marketplace etc even if part of a wider organisation. For example, is the Uber ride hailing platform separate from Uber Eats?
- For marketplaces, does it require that both sides of the market place are located in the UK or is one enough? For example, will the DST be enlivened where a UK resident uses Airbnb to book an apartment in Paris (or vice versa). What happens if the EU adopts a different definition of which side is most relevant.
- Is Apple caught via the App Store? Is it an intermediary or selling software to customers? Does this simply depend on the terms of the contracts involved or is substance over form going to play a role?
While the DST will be an allowable deduction for UK Corporate Tax purposes it is outside the scope of the UK double tax treaties and so will not be creditable against UK corporate tax.
Somewhat optimistically the Chancellor states that "It will be carefully designed to ensure it is established tech giants … that shoulder the burden" and that it is not the intention that "such a tax would fall on consumers".
Professor Richard Vann