With the Finance Bill, 2020, the Government of the UK has decided to launch Digital Service Tax (DST) with effect from 1 April 2020. 2% Value-Added Tax (VAT) will be levied on the service providers. The decision was made despite the strong pressure from the United States.
With the introduction of the Digital Service Tax, the UK aims to raise an additional annual income of £515 million by the end of 2025. DST will apply to firms generating global revenue of £500 million, where more than £25 million sales earned from UK users. A UK user is a user that is normally located in the UK. The services that fall under the new regime are social media services, internet search engines, and online marketplaces.
The current international tax regimes do not take account of the value a business generates from the user participation when allocating profits between the countries. The tax liability will be computed at the group level, but the tax will be charged on each entity in the group based on the revenue realized that contributes to the group total. Either the parent company or a single entity in the group can take up the reporting responsibilities.
The tax liability will be due on the day after nine months from the end of the accounting period.
The government supports the G7, G20 and OECD discussions on various proposals and has affirmed that this would be a temporary proportionate tax and may discontinue once an appropriate international solution is formulated. Further information and clarifications required will be released in the upcoming months.