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The UK's digital services tax (DST) might be repealed in light of the predicted implementation of pillar one, according to a tax expert, though the timeline remains uncertain. The DST, while having collected over £500 million for HM Revenue and Customs (HMRC) last year, has not been universally accepted by local tax experts.
Data obtained by international law firm DLA Piper through a freedom of information request revealed that the UK government collected £567 million ($741 million) in DST from major tech companies in 2023. “This marks a notable increase from the £380 million collected the prior year and dramatically surpasses the government's initial forecast of £465 million it made in 2020 when it launched the tax,” DLA Piper said on July 8.
The DST, introduced in April 2020, targets multinational enterprises that generate revenue from providing social media services, search engines, or online marketplaces to UK users. Companies with global revenues exceeding £500 million and more than £25 million derived from UK users must pay a 2% tax on UK-generated revenues, with the first £25 million of revenues exempt from the tax.
Matt Davies, a UK-based tax partner at DLA Piper, argues that the successful collection of DST by HMRC will signal to governments worldwide that it is a viable and potentially lucrative revenue generator. However, he stresses the importance of the OECD reaching an agreement on pillar one to prevent the proliferation of differing DSTs globally.
The emergence of DSTs internationally is partly due to the OECD Inclusive Framework's (IF) failure to finalize a multilateral convention (MLC) on amount A of pillar one by the June 30 deadline. Amount A applies to in-scope multinational enterprises and aims to allocate parts of their profits to countries where they sell products and provide services. The lack of consensus on amount A has led to the prediction that more jurisdictions will introduce DSTs.
Davies points out that these differing DSTs present an administrative burden for tech companies. “With a short-term solution unlikely, it is important for multinationals to seek out help with navigating the complex global technology tax environment that could potentially see them double taxed as a result of overlapping DSTs,” he said. Companies must determine whether they fall within the scope of these different taxes in various countries, adding to the administrative load.
“You normally pay tax on profits in different countries…but now you’re in a situation where actually just because you’ve got users in a particular country you can suddenly have your revenue rather than your profit taxed in those countries,” Davies explained. “Trying to work out where you’re taxed and how you’re taxed in different ways adds this administrative burden on top of things.”
The complexity continues when in-scope companies must calculate how many users they have in each country. “Trying to work out how many users you’ve got in a particular country [and] how they’re using your product in a way that you might not ever actually have systems in place to do that [adds a burden],” Davies added.
Chris Denning, a corporate and international tax partner at advisory firm MHA in London, believes that the introduction of pillar one should lead to the UK’s DST being repealed, though he acknowledges the timing is uncertain. An OECD secretary-general tax report to G20 finance ministers and central bank governors recently noted “near full consensus” on an MLC to implement amount A of pillar one.
Denning remarked, “In the meantime, there is already legislation in place that requires a review of the DST in 2025, so this will give the chancellor the opportunity to reconsider whether the UK should continue with it – with an eye on the impact this could have following a potential change of government in the US.”
Denning also questioned the significance of the yield from DST for HMRC last year, noting, “Whilst HMRC would appear to have had success in 2023 in collecting a higher yield from the DST, this would have been through a period of high inflation so I would question the actual increase in real terms.” He further criticized the DST as a tax on turnover, calling it a blunt instrument and pointing out that it is ultimately borne by small businesses, resellers, and consumers, who bear the costs of the tax.
Local experts have previously criticized Canada’s decision to implement a 3% DST on large foreign technology companies, warning that it would create additional complexity, stoke a US-Canada trade war, and increase costs for consumers. Despite the controversy surrounding DSTs, their use is likely to continue in the absence of an agreement on pillar one.
By fLEXI tEAM
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