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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 (MNEs). Since the financial crash in 2008 there has also been widespread public concern as to the scale of corporate tax avoidance that has been facilitated by these trends.

The OECD has co-ordinated efforts to reform the international tax rules through the ‘Base Erosion and Profit Shifting’ initiative, or ‘BEPS’ as it is known. 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 interlock, and promoting best practices. In turn the Government has introduced a series of reforms to the UK tax system in line with the BEPS initiative, as well as taking unilateral action to mitigate the risk of tax avoidance by MNEs.

However, there is widespread agreement that these reforms, while significant, have not met the challenges posed to the global tax system by digitalisation and the emergence of major tech companies. At the time of the Autumn 2017 Budget the Government published a position paper in which it set out its approach for addressing this issue – supporting a second OECD-led initiative for an international agreement on taxing MNEs, while exploring the option for a new tax on the UK-generated revenues of specific digital platform business models.[1]

In the 2018 Budget the then Chancellor Philip Hammond confirmed that the Government would introduce the Digital Services Tax (DST) from April 2020, given the relative lack of progress toward an international agreement.[2] The Government launched a consultation exercise on the design of the DST, and in July 2019 confirmed that it would include statutory provision in the next Finance Bill to be introduced after the 2019 Budget.[3] During this period a number of other countries announced similar plans for digital services taxes.[4]

In June 2019 G20 Finance Ministers agreed proposals drawn up by the OECD to find a consensus-based solution by the end of 2020.[5]  In October and November the OECD launched a two-part consultation: first, 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’);[6] and, second, a proposal for a ‘global minimum corporate tax level’.[7]

Reaching consensus has proved difficult with a strong division of opinion between the United States and other countries, as to whether there should be a voluntary component to any new international rules,[8] and over the prospect of individual digital service taxes being introduced prior to any agreement being reached.[9] In January 2020 participant countries confirmed they were working to reach a “consensus-based long-term solution …  working toward an agreement by the end of 2020”[10] although there was some scepticism as to whether the OECD’s timeframe was achievable.[11] In June 2020 the US Treasury secretary Steven Mnuchin argued that this work should be paused in the context of the Covid-19 pandemic, while reaffirming the US administration’s opposition to digital services taxes.[12] On 12 October the OECD published details of its ongoing work: participant countries confirmed that the ‘two-pillar’ approach provided a “solid foundation for a future agreement” that was now set for mid-2021.[13] Nevertheless the prospects for an international agreement remain highly uncertain.[14]

Although the Budget was initially anticipated in November 2019, it was postponed due to the timing of the 2019 General Election.  In the event the Chancellor Rishi Sunak presented his Budget on 11 March 2020.[15] The Chancellor did not mention the DST in his Budget speech, but the Budget report confirmed that provision to introduce the DST from 1 April 2020 would be included in the forthcoming Finance Bill.[16]

The Government has said it would disapply the DST if an appropriate global solution was successfully agreed and implemented, and this remains its position.[17] The Government has estimated that, if implemented, the UK’s DST could raise over £400m a year by 2021/22,[18] although there has been some question as to how reliable these estimates can be.[19]

Notes : 

[1]     HM Treasury, Corporate tax and the digital economy: position paper, November 2017

[2]     HC Deb 29 October 2018 cc661-2; HM Treasury, Digital Services Tax: Budget 2018 brief, 29 October 2018

[3]     HMRC, Introduction of the new Digital Services Tax: tax information & impact note, 11 July 2019

[4]     PQ236554, 28 March 2019. For an overview of international developments see, KPMG, Taxation of the Digitized Economy, September 2020.

[5]     G20 press notice, Communiqué,G20 Finance Ministers and Central bank Governors Meeting, Fukuoka, 8-9 June 2019. See also, OECD, BEPS Action 1 : Tax Challenges Arising from Digitalisation, ret’d January 2020

[6]     OECD press notice, OECD leading multilateral efforts to address tax challenges from digitalisation of the economy, 9 October 2019; see also, “OECD takes aim at tech giants with plan to share up global tax” & “Editorial: OECD lays foundation for fairer taxing rights”, Financial Times, 9 October 2019

[7]     OCED press notice, OECD secretariat invites public input on the Global Anti-Base Erosion (GloBE) Proposal under Pillar Two, 8 November 2019. See also, “OECD proposes global minimum corporate tax rate”, Financial Times, 8 November 2019.

[8]     “Brussels steps up pressure on US over global digital tax deal”, Financial Times, 5 December 2019

[9]     “UK to push on with digital tax in face of US anger”, Financial Times, 21 January 2020; “Editorial: International agreement on digital taxes is needed”, Financial Times, 23 January 2020

[10]    OECD press notice, International community renews commitment to multilateral efforts to address tax challenges from digitalisation of the economy, 31 January 2020

[11]    see, for example, Clifford Chance, The OECD proposal to rewrite the rules of worldwide taxation: Our take on what it means, and whether it will happen, 6 February 2020

[12]    “US upends global digital tax plans after pulling out of talks with Europe”, Financial Times, 17 June 2020

[13]    OECD press notice, International community renews commitment to address tax challenges from digitalisation of the economy, 12 October 2020

[14]    “OECD drafts principles for $100bn global corporate tax revolution”, Financial Times, 12 October 2020

[15]    HC Deb 11 March 2020 cc278-293

[16]    HMT, Overview of Tax Legislation & Rates, March 2020 para 1.16. Provision to this effect is now included in the Finance Act 2020 (specifically sections 39-72 of the Act).

[17]    Budget 2020, HC 121, March 2020 para 2.205. see also, PQ61662, 24 June 2020; HC Deb 15 September 2020 cc179-180; PQ96879, 7 October 2020.

[18]    The annual yield from the DST is estimated to be: £70m (2019/20); £280m (2020/21); £390m (2021/22); £425m (2022/23); £465m (2023/24); £515m (2024/25): see, HMRC, Digital Services Tax, 11 March 2020.

[19]    At the time of the 2018 Budget the OBR’s assessment was that the Treasury’s approach to estimating the yield from this measure was “reasonable and central, but there is a high degree of uncertainty around the central estimates of the yield” (OBR, Economic & Fiscal Outlook, Cm 9713, October 2018 para A9-14).


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