UK agrees to end Digital Services Tax and transition to Global OECD tax rules

UK – Finance (and E-Commerce)

The Digital Services Tax ("DST") will be repealed at the earlier of 31 December 2023 or the implementation of Pillar One of the Two-Pillar Solution to address the tax challenges arising from the digitalisation of the economy.

Key date(s)

• 1 April 2020: UK government introduces a 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users
• January 2023: introduction of OECD Model Reporting Rules for Digital Platforms
• 31 December 2023: deadline for repeal of the Digital Services Tax

Status

• The global digital economy – and with it, the number of businesses deriving profits from jurisdictions in which they have no physical presence – has grown rapidly in recent years. International tax rules have struggled to keep pace, causing some to criticise the perceived inappropriate or insufficient taxation of large multinational enterprises ("MNEs") in the jurisdictions in which they generate profits.
• The UK introduced the DST, levied at 2% of the gross revenue large digital companies derived from users in the country, in April 2020. This was intended as a temporary measure while work was carried out at the OECD for coordinated, multilateral measures to establish a new global tax framework.
• On 8 October 2021, 136 countries agreed a two-pillar plan for a new system. Under this system, MNEs pay tax in the countries in which they do business (pillar one), whilst all countries agree to operate a minimum 15% corporation tax rate (pillar two). Pillar one will be implemented through a multilateral convention and is expected to come into effect in 2023. The DST will remain until Pillar One comes into effect, or 31 December 2023 if earlier. The OECD will develop model rules for bringing pillar two into domestic legislation during 2022, to be effective in 2023.
• From July-October 2021, the government also consulted on the implementation of the OECD Model Reporting Rules for Digital Platforms. These require digital platforms to report details of the income of sellers on their platform to the tax authority and to the sellers and are expected to be introduced from January 2023

 What it hopes to achieve 

• A key aim of the OECD/G20 Inclusive Framework's negotiations was to rationalise the global system of digital taxation. Many member jurisdictions have implemented domestic Digital Services Taxes. The OECD aimed to stop the proliferation of these unilateral measures by replacing them with a consensus-based reallocation of taxing rights among Inclusive Framework members.
• The OECD hopes that pillar one of the solution will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinational enterprises. It will re-allocate some taxing rights over such enterprises from their home countries to markets where they earn profits, even if they have no physical presence there.

Who does it impact? 

• Groups with global turnover above €20 billion and profit margin above 10% will fall under the remit of pillar one.
• Companies with revenue above €750 million will be subject to the new minimum corporation tax under pillar two.
• Companies providing digital platforms – i.e. any software which allows sellers to be connected to consumers of the goods and services they offer – will fall within the scope of the Model Reporting Rules

Key points 

1. New profit allocation rules under pillar one

• • Pillar one provides for new profit allocation rules for MNEs that are in scope. Following the repeal of the DRT and implementation of the OECD rules, profits made through the digital platform in certain jurisdictions will be allocated to be taxed in that jurisdiction.

2. Global minimum corporation tax under pillar two

• • Under pillar two, signatories have committed to a global minimum corporation tax of 15%. MNEs operating in certain jurisdictions may therefore see their corporation tax liability increase.

3. How the transition will work in the UK

• • The government has confirmed that DST liabilities accrued between 1 January 2022 and the date of its repeal will be credited against the tax liability arising under pillar one.

4. Introduction of Model Reporting Rules for Digital Platforms
   • The Model Reporting Rules will standardise the recording and reporting of relevant information about digital sellers' activities. Platforms' obligations will include collecting details such as where their sellers are based and their earnings on the platform, verifying sellers' information, and reporting this information to the tax authority annually.

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