Digital Services Tax should be a temporary measure, advises CIOT

The Chartered Institute of Taxation believes that the government’s planned Digital Services Tax on digital companies should be a temporary fix only, lasting no longer than five years.

According to the government, Digital Services Tax (DST) will raise £1.5 billion over four years.

It will apply a two per cent tax on the revenues of specific digital businesses models where their revenues are linked to the participation of UK users and will apply to:

• Search engines
• Social media platforms
• Online marketplaces

It is not a generalised tax on online advertising or the collection of data and is not a tax on online sales of goods, so will only apply to revenues earnt from intermediating such sales.

However, the Chartered Institute of Taxation (CIOT) wants the DST repealed as soon as there is a multilateral agreement through the OECD on a global method to tax such companies on the value created on users.

Glyn Fullelove, Chair of CIOT’s Technical Committee, explained further, “Given the nature of the tax a pragmatic approach will be required in order for it to be implemented effectively. This is because revenue taxes such as this are a blunt instrument that cannot accurately represent the tax on the profits related to user based value on all businesses on which it is imposed. It will inevitably over-tax some companies and under-tax others.

“Many companies will not have the necessary information to arrive at a precise answer to how much DST they should pay. In practice the Government will have to rely on companies to arrive at a ‘best estimate’ of the amount of the DST payable based on a just and reasonable estimate of the UK revenues liable to the DST. Given the economic distortions that may arise and the somewhat arbitrary impact of this blunt solution, we would prefer that the measure is expressly time limited to a period of, say, five years.”

Fullelove added, “Unilateral measures inevitably lead to less alignment of tax bases globally, resulting in double taxation and a significant compliance burden for businesses and, consequently, stifle economic growth and innovation. Multilateral action across the globe is ultimately essential if the aim is to ensure, so far as possible, no double taxation and we hope unilateral measures can be repealed once a global long term solution is agreed.

“In practical terms the DST will be based on estimates provided by the digital business themselves and a tax operating in this way could lead to taxpayers with very similar businesses paying different amounts of DST. In our view this result is only acceptable in a temporary tax.”

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