Is now a good time for a UK digital services tax?

The message was clear at last week's OECD public consultation on the reform of the international tax rules that there is a need to fix the rules to avoid the chaos of a multitude of unilateral digital service tax (DST) measures.

The UK is one of the many jurisdictions implementing a DST.  Draft legislation was published in the summer for inclusion of a 2% DST in Finance Bill 2019/2020 with effect from April 2020 (for details see my July blog) but the Finance Bill timetable has been put on hold pending the general election.

The Conservatives stated in their manifesto that they will implement the DST as part of their approach to make major multinational companies pay their fair share of tax. The Liberal Democrats promise to improve the DST to ensure tech giants pay their fair share. Labour's plans for a DST are less clear, as, although it intends to use the taxation of multinationals, including tech giants, to pay for the operating costs of the free public full-fibre network, it may envisage that the additional receipts would be derived from a unitary taxation of all multinationals (rather than a specific digital services tax).

As the three main political parties clearly support a tax on tech giants, it is likely that some sort of DST will be brought forward in the post-election Finance Bill but we can expect to see some changes to the original draft legislation.

Before the election was called, an HMRC spokesperson reported that the next draft of the UK DST legislation will have a revised definition of “online marketplace” because the original definition is too broad and would catch business models such as franchises, which is not intended. According to the source, the government is also considering adopting a “white list” of countries that have a DST so that transactions involving these countries would not be taxed twice.

The US has repeatedly threatened there will not be a post-Brexit trade agreement with the UK unless the DST, which primarily affects US tech giants, is dropped. Might it be better to wait and see what comes out of the OECD next year by way of a global solution and what happens about Brexit rather than rush through a UK DST in the coming months?