Big Tech Gets Some Answers in Final U.K. Digital Tax Bill

Tech giants got a little more clarity on what types of revenues would fall within scope of the U.K.’s proposed 2% digital tax.

The latest Finance draft legislation released Thursday answered some of the questions the U.K. tax agency received when it opened a public consultation on the topic last year—including more details on which revenues would be subject to the tax and which should be exempt.

The measure applies a 2% tax to revenues from social media platforms, search engines, and online marketplaces—likely hitting tech giants like Facebook.com and Amazon.com Inc. It applies to companies with revenues of at least 500 million pounds ($580 million) of worldwide digital revenue and 25 million pounds of U.K. digital sales. The tax would go into effect April 1, pending its passage by Parliament.

But practitioners said important questions still remain, including whether the U.K. would unwind the tax if an OECD-led effort gets nearly 140 countries to agree to overhaul how the digital economy is taxed. And companies will want to know which countries’ digital taxes would qualify for a provision that reduces their U.K. tax liability under the measure.

Revenues

The newest draft legislation clarified when revenue would be taxed, for example, when it is from an online marketplace transaction in which a U.K. user is a party; from an online marketplace and connected to land or accommodation in the U.K.; or connected to online advertising on an online marketplace that is paid for, viewed, or otherwise consumed by U.K. users.

“It seems like they’re doing obviously what they generally intended, in trying to catch a lot of remote digital services,” said Daniel Bunn, vice president of global projects at the Tax Foundation, where he focuses on international tax issues.

The additional details on covered revenues aren’t a material change from earlier drafts, said David Klass, head of tax at law firm Hunter Andrews Kurth. But “it is useful that the government is clarifying for companies what types of revenue are caught, and explaining explicitly what was implied in the previous draft,” he said.

Some Exemptions

Earlier versions of the legislation had built in an exemption for financial services, so online trading of bonds and shares were exempt but it wasn’t clear that foreign exchange and commodities trading would be as well, Dan Neidle, a partner at Clifford Chance in London said in a March 16 email.

The legislation now confirms that those services will also be carved out.

The tax excludes online financial marketplaces—including those that facilitate trading financial instruments, commodities, and foreign exchange, the document said.

The new draft also clarified that while search engine revenues are captured by the tax, companies won’t see their revenues subject to the measure just because their website contains a search function—even if that function helps the site generate revenue, said Matthew Herrington, partner, international tax at KPMG in London on March 19.

“It’s helpful for retailers and e-commerce sites who have websites with search function to know that they won’t be considered search engines,” Herrington said.

The U.K.’s digital services tax already excludes retailers and e-commerce sites that sell their own products from the definition of online marketplaces.

Alternative Calculations

Companies may still have questions on a provision aimed at helping soften the full blow of the tax for low-margin companies.

The legislation would let lower-margin companies separate their digital revenues by the service type—online advertising versus online marketplace, for example—and allocate expenses against each service type individually.

The “alternative basis of calculation” provision—which has been part of the legislation since earlier drafts—addresses criticisms that the tax disproportionately hurts low-margin companies, Bunn said. Low-margin companies that complete the full calculation could see lower tax liabilities.

But it isn’t clear which expenses would be applicable, and companies may find tax authorities challenging whether they’d allocated the expenses properly, Bunn added.

International View

The U.K. measure would apply a 50% discount on the tax when the income comes from a transaction that’s also subject to a similar digital tax in another country.

A major unanswered question remains as to which digital services taxes the U.K. tax agency will consider eligible for this discount, Herrington said.

“The government still hasn’t made this clear which DSTs this will apply to (merely noting in the guidance published alongside today’s legislation that it will clarify this “in due course”) and will need to do this soon as the tax is only weeks away from being implemented,” he said.

The U.K. also hasn’t said whether Organization for Economic Cooperation and Development-led international agreement would convince the government to roll back the measure. Other countries that have preceded the U.K. in enacting a digital revenue tax, including France, have said they’d withdraw their measures or replace them once an OECD solution is in place.

The OECD has said the new coronavirus pandemic won’t stop its work to get an agreement by the end of the year as it moves to virtual meetings and remote working. The organization has outlined a proposal would go far beyond a tax on digital revenues. It’s aiming to overhaul the rules and agreements that determine how a multinational’s taxable profits are allocated among the countries where it does business to address concerns some multinationals aren’t paying enough in taxes in the countries where they have users and customers.

The U.K. government instead has only said it will reconsider the measure in 2025.