Digital Services Tax

The context for international corporate tax reform

Over the last few years there has been a growing consensus among policy makers, academics and businesses that the international tax system has been outpaced by globalisation and the growth and scale of multinational enterprises. Since the financial crash in 2008 there has also been widespread public concern about the scale of corporate tax avoidance facilitated by these trends.

The Organisation for Economic Co-operation and Development (OECD) has co-ordinated efforts to reform the international tax rules through the ‘Base Erosion and Profit Shifting’ initiative (‘BEPS’). In 2015 G20 Finance Ministers agreed a series of recommendations for setting minimum standards in national tax systems, revising international standards for the way those systems interact, and promoting best practices.

The UK’s Digital Services Tax

There is widespread agreement that these reforms, while significant, have not met the challenges posed by digitalisation and the emergence of major tech companies. In the 2018 Budget the UK Government announced it would introduce a Digital Services Tax (DST) from April 2020, to ensure that digital businesses paid tax that reflected the value they derive from UK users, as an interim measure, pending an international agreement to reform the corporate tax framework.

The OECD’s ‘Two Pillar’ initiative

In autumn 2019 the OECD published plans for reforming the international tax system, based on two ‘pillars’:

• Pillar One : proposals for determining where tax should be paid and on what basis (‘nexus’), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’);
• Pillar Two : a proposal for a global minimum corporate tax level.

Reaching consensus has proved difficult due to the practical impact of the Covid-19 pandemic, and to strong divisions of opinion. In particular, the US authorities have argued that individual digital service taxes, which several countries have introduced, discriminate against American tech companies, and have threatened retaliatory action in the form of tariffs, raising the prospect of an international trade war.

In June 2021 G7 Finance Ministers announced an agreement on the ‘two pillar’ approach to reform, widely reported as a major breakthrough. The deal included establishing a global minimum rate to ensure multinationals paid tax of at least 15% in each country they operated in. In turn in October 2021 the OECD announced over 135 countries and jurisdictions endorsed this approach, with a view to implementing these reforms from 2023.

The UK’s implementation of Pillar Two

Following a consultation exercise in spring 2022, the Government confirmed in the Autumn Statement 2022 that it would implement the OECD Pillar Two rules for a global minimum corporate tax rate, for accounting periods beginning on or after 31 December 2023. Provision to this effect was included in the Finance Act 2023 (specifically part 3 and part 4 of the Act), which was introduced following the Spring Budget 2023. Further provision is included in the Finance Bill 2023-24 (specifically clause 21 and schedule 12), which was introduced following the Autumn Statement 2023. The Office for Budget Responsibility forecast that implementing these reforms will raise £2.8 billion in 2028/29, although, as they emphasize, this estimate is highly uncertain.

This briefing discusses the context for these proposed reforms to the international tax system, before discussing the introduction of the UK’s Digital Services Tax and the historical development of the OECD’s ‘Two-Pillar’ solution. The first section provides an overview of this long series of events.