The UK’s Digital Services Tax (“DST”), which is a 2% levy on certain revenues derived from search engines, social media services and online marketplaces, is set to apply with effect from 1 April 2020, with the first payments being due in 2021. The UK government is committed to reviewing the DST before the end of 2025, with a view to repealing it if a suitable solution to the challenges posed by the digitalisation of the economy is found at the international level. However, with the US pulling out of the OECD’s discussions on such a solution, its shape and timing are in doubt.
The problems with unilateral measures
Unilateral measures such as the UK’s DST are not without flaws, and one of the major concerns is the interaction of such rough and ready options that are increasing across the world, which would expose global businesses to greater risk of double taxation and high compliance costs.
These unilateral measures have sparked trade tensions with the US, leading to countries such as France putting their DSTs on hold. However, there are others, such as the UK and India (with amendments to its equalisation levy) that have forged ahead. In fact, the DST recently featured as a possible additional revenue source in a factsheet relating to the EU’s long term budget.
The spurt in unilateral measures despite the US's threat of retaliatory trade action shows the pressure that governments across the world are facing to tax tech giants that are viewed as deriving profits from these countries without being covered adequately by their tax rules. Once these measures start contributing to the countries’ coffers, the incentive to review them will decline, especially if there is a delay in reaching a robust solution at the international level. The UK’s DST is expected to raise around £400m a year. In the economic aftermath of COVID-19, that seemingly small amount will become important.
OECD continues work on the multilateral solution
Despite the US’s stance, the OECD has asked the 137 members of the Inclusive Framework to continue the work on the multilateral solution that it aims to deliver by the end of 2020. Whether or not any real progress can be made without the US remains to be seen, but it seems sensible to continue to flesh out the proposals. The alternative is an unprincipled patchwork of unilateral measures all trying to tackle the same problem but in slightly different ways, which would hurt global commerce at a time when economies across the world need it to thrive.
Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back. This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions. A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further.