The new Digital Services Tax came into force in the UK today.
Under the tax, search engines, social media platforms and online marketplaces that make revenue from users in the UK will be subject to a 2% tax on their revenues.
According to HM Revenue and Customs, the new tax has been introduced due to a “misalignment between the place where profits are taxed and the place where value is created”. In other words, many online platforms make money from users in various countries, but this is not taken into account when “allocating the profits of a business between different countries”.
It will apply to organisations with revenue generated by digital activities of over £500m, with and more than £25m of this derived from UK users, meaning the tax will generally only affect large multinational companies. According to the Financial Times, the UK government aims to raise £500m a year from the tax.
The UK government has said it would consider scrapping the tax if a reform of the international corporate tax rules by G7, G20 or OECD was to take place.
Digital Services Tax targets online giants
The idea was first presented back in 2018 by former Chancellor Philip Hammond and was included in the 2020 Budget, but has received backlash from some who believe that it could lead to retaliation from the US, with Silicon Valley tech giants such as Google, Amazon and Facebook affected by the digital services tax. Some also fear it could impact possible post-Brexit trade deals between the UK and the US, with President Donald Trump threatening to impose additional tariffs on the UK.
Others have highlighted that it could also have a negative impact on UK-based companies compared with foreign counterparts.
Russ Shaw, founder of Tech London Advocates & Global Tech Advocates believes that an international tax scheme for big tech may be a better approach, especially amidst the current Covid-19 pandemic:
“Although broader political activity must go on, the Chancellor’s decision to push forwards with a digital services tax and go it alone is not a timely move. While ‘Big Tech’ must pay its fair share, the OECD has committed to delivering a comprehensive multi-lateral tax scheme by the end of this year, and we must give them the opportunity and support to do so – before going it alone.
“The tech sector, along with the rest of the UK economy, is already facing the monumental impact of the Coronavirus pandemic. We should be working more closely than ever with the world’s biggest businesses to engage their substantial resources and expertise with tech start-ups and early-stage firms in the UK for what could prove a vital lifeline.
“This decision may also negatively impact our attempts to negotiate a trans-Atlantic free trade deal – any retaliation from the US in the current climate would add even greater pressure on UK tech companies.”