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UK Budget introduces a unilateral Digital Services Tax
UK Chancellor Philip Hammond announced the introduction of a new 2 per cent Digital Services Tax (DST) as part of the 2018 UK Budget on Monday. The new tax, which applies from April 2020, will apply to certain "in-scope revenues" that arise from UK users participating on certain Internet platforms, such as revenues derived from advertising directed at UK users by social media and search engines, and revenues earned by online marketplaces facilitating transactions between UK users.
The DST is subject to a £25 million (S$44.2 million) per annum allowance and will only apply to groups that generate global revenues from in-scope business activities in excess of £500 million per annum. The measures will include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins. In introducing the measure, the UK government announced that it remains committed to Group of 20 (G-20) and Organisation for Economic Co-operation and Development (OECD) discussions on potential future reforms to the international corporate tax framework, and will apply the DST only until an appropriate long-term solution is in place. If agreement is reached through these forums prior to 2020, it is possible that the DST will not be introduced.
The measure follows the UK government's release of a consultation paper earlier this year which set out its views on the taxation of the digital economy and, in particular, how "user-generated value" should be taxed. The taxation of user-generated value represents a fundamental shift in the manner in which income taxing rights are allocated, from one which generally looks to where functions that generate profit-generating activities are performed to one that looks to where users are located and the markets in which non-resident taxpayers operate. The consultation paper flagged the introduction of the DST, noting the need for an interim measure pending global consensus on the appropriate method to tax the digital economy.
The taxation of the digital economy represents one of the biggest challenges facing the current international tax environment. While the OECD has attempted to drive the reform agenda, its sovereignty over this issue is being challenged by measures driven by the European Union, as well as various unilateral measures. The OECD is expected to deliver a consensus-based outcome on this subject in 2020; however, the UK has now joined a number of countries that have either introduced or proposed introducing interim measures to address digital economy taxation in the intervening period. The proliferation of these unilateral measures which generally operate outside tax treaty frameworks presents a significant double taxation risk.
The OECD has attempted to introduce a broader range of views in formulating its digital economy response through the creation of the Inclusive Framework. Singapore, as well as a number of other Asian countries, are members of the Inclusive Framework, which should entitle members to participate on an equal footing in digital economy discussions. It remains to be seen whether the inclusion of a range of potentially divergent views on digital economy taxation will aid or hamper attempts to achieve a consensus approach to the taxation of the digital economy.
- The writers are from Baker McKenzie Wong & Leow.
Allen Tan is head of tax, and Tom Roth, senior associate.