The proposed Digital Services Tax (DST) aims to hold multinational corporations without a physical presence in the United Kingdom accountable for proportional tax rates. Will it work?

The Current State of Affairs

With the unprecedented expansion of economic globalism and the digitisation of international markets, the question of taxation is unavoidable. At present, according to Article 5 of the OECD convention, to which the UK is bound, a member state can only tax the business profits of a foreign company if it has a ‘permanent establishment’ in the state. This requires a business to have a physical presence in a state to be liable to pay business tax. The natural question to ask, then, is what if a company has no physical presence in a state bound to the convention?

Presently, in countries bound to the OECD convention, international companies with no physical presence in a national market are not liable to pay business tax. As the economy continues to digitise, companies are able to advertise, collect data, and engage in branding remotely without establishing a permanent headquarters in other countries. This can possibly entail a disconnect between profit earned and where tax can be levied. Where a company can avoid construction, tenancy or employee wage costs in establishing a physical international branch, it is foreseeable that remote operation and, consequently, digitisation shall continue to take markets by storm.

The Organisation for Economic Co-operation and Development’s (OECD) current regulation on taxation where multi-jurisdictional scenarios are at play is also unclear. For example, if a German photographer doing a shoot in Poland was to post a promotional video on an American video-hosting platform, only for a UK national to view it alongside an advertisement from a Swedish company at the bottom of the screen, difficulties arise in determining who is liable to pay business taxes. This is due to the complexity in discerning the precise location of where value was created, which is required to establish an appropriate tax base.

The United Kingdom’s Position

The Finance Bill 2019-20, which was announced by the government on October 31st, aims to remedy the oversight in digital taxation. Included in the bill is a Digital Services Tax (DST) which will directly apply to revenues drawn from social media platforms, search engines and online shops that incur revenue from UK consumers. There are two additional income requirements to fall within the scope of taxation. Firstly, a business must incur a global digital services revenue of £500 million. Secondly, £25 million in revenue is to be derived from UK users of digital services. Meeting these requirements shall trigger a 2% rate on the amount of revenue drawn from UK consumers of digital services exceeding £25 million.

If passed, the government expects the tax to come into force in April 2020. The government also forecasts that if it is passed, it shall raise capital of £275 million between 2020 and 2021 and increase to £440 million between 2023-24.

This innovation in tax policy does arguably hold tech giants such as Facebook, Netflix, and Google, which infamously do not require a physical presence in the countries it operates in to create revenue, more accountable to pay proportionate levels of taxation.

By Brighton Dube

A Taxation Conundrum - The Difficulties of a Digitised Economy