Digital tax megabyte for July 2019

A collection of the brief insights throughout July 2019 of the type provided on an ad hoc basis in our Latest digital tax byte update.

On 11 July 2019, the UK Finance Bill for 2019/20 was released for public consultation until 5 September 2019. As expected, it includes draft legislation for a Digital Services Tax (DST) to apply from 1 April 2020. Further details below. 

In related news, the United States Trade Department announced on 10 July an investigation into whether the French DST (subsequently passed in the French Senate on 11 July) is discriminatory against US businesses. If it is found to be so, this could result in the US levying tariffs on French goods and services. While the UK DST has significant differences to the French DST, there is clear US opposition to such measures.

The 2019/20 Finance Bill contains draft legislation to enact the UK DST:

• The DST will apply from 1 April 2020, at 2% of deemed UK revenues (those earned directly or indirectly from interaction with UK users in providing them with search engine, online marketplace, social media services, or associated advertising business) derived in excess of £25m, where the group's total global in-scope revenues exceed £500m. A safe-harbour exists and lowers the 2% rate where applicable (see below).
• In terms of attributing deemed revenues to the UK:
• For advertising revenues, the distinction is whether the advertisements were intended to be viewed by UK users. 
• For online marketplace and social media revenues, the revenues must arise in connection with UK users. An exemption is included for online marketplaces provided by FSMA regulated persons where more than 50% of relevant revenues arise in connection with trade or creation of financial assets.
• The allocation to UK users must be on a "just and reasonable" basis 
• A UK user will be any individual that it is reasonable to assume is normally located in the UK, plus any other user established in the UK (contrasting with the French definition, which requires the user to be located in France at the instance of interaction).
• If revenues are earned as a result of online marketplace services, where one user is located in the UK and the other user with whom they are interacting is located in another country with a similar tax, the UK DST will apply to 50% of the revenues only (unless relating to sales of UK land, accommodation, or related services).
• More detail is provided than in the earlier consultations on the definitions of the in scope business models (except search engines). Broadly, the test requires the main purpose (or one of the main purposes) of a platform to be:
• promoting interaction between users and share content (social media), 
• facilitating the sale of goods, services or other property, and enables the users to sell, advertise, or otherwise offer them to other users
• The safe-harbour requires an election to be made, and further calculations undertaken to split relevant revenues across the in scope business activities (such that it may not apply to all activities). For each category of in-scope UK revenues, relevant expenses may then be deducted in calculating a deemed profit margin, which would then effectively be taxed at 80% in place of a 2% revenue tax. Thus this would be beneficial where the deemed profit margin does not exceed 2.5%. Allowable operating expenses for this calculation include a just and reasonable apportionment of all expenses attributable to the earning of the relevant UK revenues, except in relation to interest expense, acquisition costs, exceptional items, impairments and taxes. 
• The tax will be due annually in line with a groups accounting period, (and like corporation tax, due 9 months and 1 day after the end of that period), and applies across groups as defined for GAAP purposes, with each member of the group being liable for a share of the total due in line with the relevant UK deemed revenues that they received as a share of the group's total in scope revenues.
• The ultimate parent or a company nominated by that parent will be required to deal with compliance and reporting for the whole group.
• Anti-avoidance provisions apply to ignore arrangements with a sole or main purpose of achieving a tax advantage (i.e. a reduction in the tax due) not aligned with the policy objectives.

A more detailed insight into the UK DST draft legislation and guidance can be seen here.

For the most up-to-date information, see the Latest digital tax byte.

For more information please contact Dave Murray, Aamer Rafiq, Phil Greenfield, Giorgia Maffini or Charlotte Richardson