JOURNAL OF INTERNATIONAL TAXATION

UK DST l DECEMBER 2020 l JOURNAL OF INTERNATIONAL TAXATION 67

The UK’s digital services tax (DST) is now up and running, and one of the big emerging stories has beenthat certain large multinationals falling squarelywithin the scope of the new tax have taken the decisionto pass on the cost of the DST to their commercialpartners rather than bear the cost of the tax themselves.This has, unsurprisingly, proved somewhat contro-versial. This article examines the background to thisdevelopment and to the DST in general, and considerswhat the implications of the decision may be.

The introduction of the DST into the UK tax code is part of a wider process; but it takes on addedsignificance in that it has come into force at a time when, due to the Covid-19 pandemic, the UKgovernment’s tax take is under greater pressure than perhaps at any point in recent memory.

The UK’sDigital

Services Tax

DAV I D K L A S S

S O M E P R E L I M I N A R Y R E A C T I O N S

Recap of the UK DSTThe UK’s DST applies to a company orgroup of companies only where the twofollowing annual thresholds are exceeded:(1) £500m of worldwide revenue arisesfrom digital services activities; and (2)£25m of those revenues is attributable toUK users. If those thresholds are met, thefirst £25m of worldwide in-scope revenues(so-called “UK digital services revenues”)are exempt, with the excess being subjectto tax at a rate of 2%.

Digital Services Activities. Digital serv-ices revenues arise in connection withdigital services activities. Digital servicesactivities include: (1) a social media plat-form; (2) an internet search engine; and(3) an online marketplace. In connectionwith an online marketplace, in-scoperevenue would typically be commissionon a successful transaction, but couldcover numerous other types of fees aswell. In connection with a social mediaplatform, subscription fees payable bymembers is an example of fees that wouldbe in-scope. So far as the social media category is

concerned, this includes, among otherthings, social and professional networking,video sharing platforms and platformsthat exist primarily to share user reviews.Since the scope of “social media platform”is arguably the most difficult of the threeto pinpoint – for example, to what extentshould a multi-player video game betreated as this type of platform – the DSTcode provides that the following two fac-tors should be considered in order to helpdetermine whether the activity constitutesa social media activity: • the main purpose, or one of the mainpurposes, of the service is to promoteinteraction between users (includinginteraction between users and user-generated content); and

• making content generated by usersavailable to other users is a significantfeature of the service.

Attribution of Digital Services Revenuesto UK Users. Of a group’s worldwide rev-enues arising from in-scope activities,only those attributable to UK users (the“UK digital services revenues”) arewithin the scope of the DST. When itcomes to determining the extent towhich digital services are attributableto UK users, the general rule is that dig-ital revenues that “arise in connectionwith UK users” will be attributable toUK users. However, in the case of onlinemarketplaces the rules are more specific– for example, it is provided that wherethe subject matter of a transaction island or accommodation located in theUK, then the related revenues will beconsidered attributable to UK users;and, so far as online advertising revenueis concerned, revenues received will betreated as UK digital services revenueswhere the advertising is viewed (“or oth-erwise consumed”) by UK users. An in-dividual is a UK user where he or she isnormally in the UK; a non-individualwill be a UK user where that person isestablished in the UK. In each scenario,the test is whether it is “reasonable toassume” that such is the case. A form of double tax relief applies in

the case of cross border transactions ononline marketplaces, which is that theDST applicable to UK digital services rev-enues arising from online marketplacetransactions is reduced by 50% where theforeign user is located in a jurisdictionwhich applies a similar tax to DST.

Introduction of UK DSTThe context of the genesis of the DSTwas the attempt to agree, at an interna-tional level, how to tax multinationalsoperating in the “digital” economy moreeffectively than existing principles of in-ternational taxation allow, requiring asthey do some degree of presence in thejurisdiction wishing to impose taxation.However, the UK government claimedthat it believed progress at the OECDlevel was not being made quickly enough(it has not been the only jurisdiction toexpress this belief). In the 2018 Budget,the UK government set forth the pro-posed DST, explaining its introductionwas based on the lack of progress at the

international level (describing suchprogress as “painfully slow”). The UK is far from the only jurisdiction

which has elected to “go it alone” in viewof the lack of agreement at the interna-tional level: the UK DST is joined by anarray of other digital services taxes, in adiverse range of economies; several Eu-ropean countries have introduced such atax (including Austria, France, Hungary,Italy, Poland and Spain) and a number ofnon-European countries. Meanwhile theOECD has been campaigning hard forthe need to reach a global consensus onhow to address the digital services taxationissue, until recently insisting that every-thing remained on track toward full agree-ment by the end of 2020. The introduction of the DST into the

UK tax code is thus part of a wider process;but it takes on added significance in thatit has come into force at a time when, dueto the Covid-19 pandemic, the UK gov-

JOURNAL OF INTERNATIONAL TAXATION l DECEMBER 2020 l UK DST68

David Klass is a partner with Hunton AndrewsKurth, a global law firm handling transactional, lit-igation and regulatory matters for clients in areassuch as energy, financial services, real estate, retailand consumer products and technology. David canbe contacted by email: [email protected].

ernment’s tax take is under greater pres-sure than perhaps at any point in recentmemory.

How Covid-19 Changedthe Fiscal LandscapeThe economic impact of the Covid-19pandemic is profound and international.Few economies globally have remaineduntouched (although the rate of economicrecovery varies significantly, as countriesdeal with different degrees of success withthe “second wave” of the pandemic). TheUK is currently experiencing its deepestrecession in 300 years. The extent of UKgovernment support for a partially locked-down economy has been, and continuesto be, huge and quite unprecedented. TheInstitute for Government (IfG) in the UKpoints out that the UK government hasreplaced 57% of the income that UKhouseholds would otherwise have lost

during the lockdown. Other major Euro-pean economies have enjoyed similar lev-els of government support (Germany(60%), Spain (60%) Italy (55%) and France(77%)). In the UK, this has taken various

forms, including the Coronavirus Job Re-tention Scheme, the Self-Employed In-come Support Scheme and grants andloans to businesses. The IfG estimatesthe cost of Covid-19 economic supportmeasures announced by the UK govern-ment in the year 2020/2021 to be almost£200bn. This additional outlay has beenaccompanied by a huge drop in tax rev-enue. One of the most significant causesof the drop in tax revenue due is the factthat economic output has shrunk dras-tically. Tax revenues this year are nowexpected to be £105bn less than what wasforecast in March. Tax revenue will befurther reduced as a result of measurestaken by the government to support busi-

ness, such as cuts in business rates forcommercial properties and permittingthe deferral of payments of VAT. As theIfG notes, almost every single major UKtax (including income taxes, National In-surance contributions, corporation tax,stamp duty land tax and fuel duty) yieldedlower revenues in the spring of 2020 thanin the same period in 2019. Further, theposition as regards tax revenues is notanticipated to improve in the near future;in fact, the IfG expects it to become evenmore pronounced, not to mention thepotential impact of carried forward taxlosses, as and when companies return toprofit in the future. The drop in economic output is ex-

pected to be greater than that resultingfrom the Depression of 1920-21. Thereare thus multiple sources of pressure ongovernment finances, both in terms ofcash flow (arising from extending dead-lines to pay tax that has fallen due) andin terms of absolute costs, such as wherenew measures involve permanently de-ferring tax that would otherwise havebeen payable. Against this background,the UK government’s estimate that theannual yield from the DST will increaseto more than £500m by the year 2024-25 (assuming it has not been replaced bythen) represents a significant boost tothe public finances. Notwithstanding theeffect of the pandemic on large swathesof the economy, providers of digital serv-ices are among the few economic “win-ners” and appear likely to remain inrobust economic health going forward,with people using their services morethan ever before, and with no prospectof a downturn in that usage in sight. Ifthe UK government had wanted to singleout an area of the economy for additionaltaxation, it is likely this would have beenthe one.

The Wider International PictureThe OECD has been campaigning hardfor several years to reach a global con-sensus on how to address the digital serv-ices taxation issue. The topic is one ofthe Actions of its Base Erosion and ProfitShifting project, and is arguably the trick-iest of them all, since there is so much


at stake: national interests are unusuallydivergent (particularly on either side ofthe Atlantic) in comparison with theother Actions forming the BEPS project,and the radical proposals (radical becausethey must be so) represent a significantdeparture from decades-old principlesof the allocation of taxing rights so faras cross-border activity is concerned. The self-imposed deadline for full

agreement at the OECD level at the endof 2020 was always going to be a tallorder, but in the absence of the Covid-19 pandemic, it may have been achievable(witness the speed with which the fifteenActions of the BEPS project itself werefinalized in what many believed was anunfeasibly short timescale). The outbreakof the pandemic had (at least) two majornegative consequences so far as progressat the OECD level was concerned: firstand foremost it turned most govern-ments’ attention away from non-essentialactivity – such as considering how bestto tax multinational digital companies– to how to deal with the pandemic, bothfrom a public health and an economicperspective, in particular how to preventlocal economies from going into terminaldecline; it also meant that meetings ofthe representatives of the countries con-cerned became far more difficult to hold. Nevertheless, for several months, the

OECD stood firm and insisted the end of2020 deadline was achievable and indeedwould be adhered to. Not until its pressrelease of 12 October did it publicly ac-knowledge that this deadline was no longerfeasible. The new target of mid-2021 isclearly far more realistic, but there are noguarantees that even this postponed dead-line will be met. In broad terms, the OECDgrouped its proposals into two ‘pillars’:the first to cover changes to the rules re-garding the allocation of taxing rights be-tween countries; the second to cover thecontinued risk of companies ‘profit shift-ing’ – that is, exploiting the mismatchesbetween national tax systems to reducethe total amount of tax they pay. The formal acknowledgement on the

part of the OECD that the 2020 deadlineis no longer achievable represents an im-portant milestone, and could in fact serveto refocus participating jurisdictions asone has the feeling that to have had in place

a deadline that felt increasingly unrealisticwas somewhat unhelpful. For example,now that a revised and more realistictimetable is in place, it will be interestingto see what approach the European Com-mission takes toward progressing its pro-posed digital tax. The OECD can be expected to do

everything within its power to ensure thatthe revised deadline is not pushed backany further. The OECD notes in its recentlypublished Cover Statement on the reportson Pillars One and Two (addressing theallocation of taxing rights, and the con-tinued risk of profit shifting, respectively)that the effect of the pandemic has beento put further pressure on governments“to ensure that large, internationally op-erating, and profitable businesses pay theirfair share and do so in the right place.”The longer the absence of internationalagreement continues, the more likely thenational DSTs will continue to proliferateand perhaps even become permanentrather than merely temporary, an outcomethat would be unsatisfactory for both theOECD and taxpayers themselves.

U.S. stance on national DSTs. One cannotconsider a discussion of national digitaltaxes such as the UK’s to be completewithout recognizing the importance ofthe U.S. angle. The U.S. government hasrepeatedly expressed the view that na-tional digital taxes unfairly target U.S.businesses in a de facto discriminatorymanner. And the U.S. has the ability sig-nificantly to influence outcomes in thisregard – not solely because its voice carriesweight on the international stage, but be-cause for many countries it represents animportant export jurisdiction. The Frenchexperience is a good example of this. France was one of the early adopters

of a national digital services tax in 2019,but significant U.S. pressure and the threatof U.S. tariffs on French imports led tothe French government’s agreement topostpone collection of their DST until(at least) 2021. Then, on 6 June of thisyear, the Office of the U.S. Trade Repre-sentative (“USTR”) announced that it wasopening an investigation into severalother digital services taxes (both existingand proposed), including the UK’s, againalleging among other things de facto dis-

crimination against U.S. companies, inlight of the large thresholds for liability. The DSTs under U.S. investigation now

are those in Austria, Brazil, the Czech Re-public, India, Indonesia, Italy, Spain,Turkey, the UK and the European Com-mission. The USTR’s investigation is beingconducted under Section 301 of the TradeAct of 1974, which empowers the USTRto take action in circumstances where “anact, policy, or practice of a foreign countryis unreasonable or discriminatory and bur-dens or restricts United States commerce.” Several of the grounds for investigation

cited by the USTR with regard to theFrench DST (the rate of which is slightlyhigher than the UK’s, at 3 percent) applyto the UK DST as well. These include al-leged discrimination against U.S. compa-nies (the threshold for the French tax beingEUR 750m); the tax’s extra-territoriality;the taxation of revenue rather than profit;and, in the USTR’s view, “a purpose of pe-nalizing particular technology companiesfor their commercial success.” Unlike theUK DST, the French DST incorporates aretroactive feature (to 1 January 2019). The three areas of focus of the USTR’s

investigation into the other DSTs are al-leged discrimination against U.S. com-panies, retroactivity, and the question ofunreasonable tax policy. With regard totax policy, the potential issues that havebeen identified by the USTR are that theDSTs may diverge from norms reflectedin both the U.S. and the international taxsystems “in several respects.” The key find-ings of the USTR’s investigation into theFrench DST were that the French DSTdiscriminated against U.S. digital com-panies “due to the selection of servicescovered and the revenue thresholds,” andthat the proposed taxation of revenuerather than income was in contraventionof prevailing tax principles, and was “par-ticularly burdensome for covered U.S.companies.” It seems unlikely that, if the USTR

judged those tests to be failed in respectof the French DST, similar features of theDSTs currently under investigation wouldbe viewed differently. It remains to beseen whether much progress will be madeon this front ahead of the impending pres-idential elections in the U.S. – and whethera change in Administration could lead to


a change in approach. Either way the U.S.stance is an important part of the picture.

Approach Taken byGoogle and AmazonBoth Amazon and Google are two high-profile examples of multinationals in thedirect firing line of the UK DST, and whohave elected to pass the cost of the UKDST on to their commercial partners(broadly sellers in the case of Amazon,and those placing advertisements in thecase of Google). Amazon has increased,by 2%, the amount of its: • referral fees (a percentage of each or-dered product’s gross sales proceeds);

• Fulfilment by Amazon (FBA) fees (feespaid per unit shipped when using theFBA programme, based on the producttype, dimensions and weight);

• monthly FBA Storage fees (for storageof items in an Amazon fulfilment centre);

• Multi-Channel Fulfilment (MCF) fees,that Amazon charges for fulfilling or-ders from other websites using inven-tory stores in their fulfilment centres. So far as Google is concerned, the fol-

lowing appears on the Support section oftheir website:

As of November 1, 2020, a 2% UKDST Fee will be added to your nextinvoice or statement for ads served inthe United Kingdom. The fee is drivenby the new digital services tax in thatcountry.

On one level this is merely a straightfor-ward decision to pass on the cost of the DST,in full (notably not even to share it). Clearlythe decision has been taken that, since thecost is something that can easily be avoided,then that is what they will do. An alternativeanalysis may be to view the arrangement asa form of gross-up, along the lines of gross-ups for withholding taxes in the context ofcross-border loans, which the market hascome to accept, notwithstanding the factthat strictly the tax liability is the lender’si.e. the borrower keeps the lender wholeagainst the lender’s liability to tax. As the action taken by Google and

Amazon has gradually filtered throughto the public in recent weeks, the reac-tion has been getting louder. In manycases the reaction has not been to crit-icize the action of the companies con-


cerned, but rather to focus on the ap-parent ineffectiveness of the DST. Thedebate about the appropriateness orotherwise of the decisions taken by Ama-zon and Google has been played outsomewhat in the British press, with var-ious publications and commentatorsexpressing their exasperation at the out-come and suggesting that the DSTshould be considered a failure. Indeed, the leading article in The Times

newspaper on 14 October described theDST as “ill-designed” legislation, whichserves to entrench the position of largemultinationals. Although there is broadpublic support for some sort of greater tax-ation of the major multinationals operatingin the digital arena, the stance assumed byboth Amazon and Google means the sup-port for the DST’s design is less hearty thanthat for the principle of its existence. So faras the government is concerned, whilst itmay be the case that there is frustration inprivate at the approach of these two multi-nationals, in a response of 7 October 2020to the question whether the governmentwas taking measures to prevent the passingon of the cost, among others, to “sellingpartners”, the government stated: “It is forbusinesses to decide their own pricing strate-gies.” On the basis of this response, it seemsunlikely that the UK government will ex-

press any further public view on the ap-propriateness or otherwise of the measurestaken by Google and Amazon.

ConclusionTo take a step back: what constitutes a suc-cess (and by corollary, a failure) when itcomes to implementing a completely newform of tax? Contrary to the view thatGoogle’s and Amazon’s actions prove thatthe DST is not fit for purpose, there is an-other perspective from which to considerthe DST, which is that it has never beenparaded by the UK government as the com-plete answer to the digital taxation conun-drum, but rather should be judged for whatit is; namely a temporary measure intendedto obtain from the largest providers of dig-ital-based services a tax contribution thatbetter reflects the benefit they obtain fromtheir significant UK user base. There are those who believe the UK

DST (and its overseas equivalents) madeeconomic sense even before the pandemic.The argument for direct, targeted, tem-porary revenue-raising from the sectorbenefiting most from the pandemic issurely now even stronger. The DST maynot be the most elegant or avoidance-proofform of taxation that could have been in-troduced, but it is notable that, among all

of the criticism, there has been little attemptto propose a temporary solution that wouldhave been better in achieving its aim. Interestingly, the Times’ Leading Ar-

ticle of 14 October referred to abovewent so far as to suggest that taxationwas not the solution at all – recommend-ing regulatory intervention: “Lackingthe ability to tax effectively, democraticgovernments need to turn to anti-trustlegislation to rein in the power of techgiants.” But this would not solve the taxconundrum. One might suggest an al-ternative reaction, namely, a stop-gapmeasure, which raises material revenueat a time when huge swathes of the econ-omy are struggling to be profitable, froma sector which has seen its profitabilitycontinue to grow notwithstanding thepandemic, and in respect of which thereis general agreement that current taxrules are inadequate, in circumstanceswhere international agreement remainsfar off and is unlikely to materialise forover six months, could be regarded a(qualified) success. And if, over the nextfive years, it raises nearly £2bn as antic-ipated (at least by the UK government),then this author believes that there is astrong argument that, particularly in thecurrent climate, it will have served a use-ful purpose. �


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