Insights Government reaches agreement on transition away from Digital Services Tax

The UK Government has agreed a route forward to transition away from its Digital Services Tax (DST) towards a new global tax system.

The deal struck by the UK, US, France, Italy, Austria and Spain outlines a DST credit system which will bridge the gap between the UK’s DST and the start of the new system, which is due to be implemented in 2023.

On 8 October 2021, OECD-led discussions resulted in 136 countries agreeing a plan for a new system where multinationals pay a share of tax in the countries in which they do business (known as Pillar One), whilst countries operate a minimum 15% corporation tax rate (known as Pillar Two).

The rules would apply to global firms with at least a 10% profit margin and would see 25% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate. Pillar 1 will be implemented through a Multilateral Convention (MLC) with this aiming to come into effect in 2023.

Under Pillar Two, a 15% global minimum corporation tax would be effective from 2023. This would be operated on a country-by-country basis, creating, the Government says, a more level playing field for UK firms and cracking down on tax avoidance.

As part of the deal, the US would not levy tariffs in response to the UK’s DST, which was introduced in April 2020. The UK would also keep the revenue raised from the DST until the Pillar One reforms become operational. The DST credit agreement states that once Pillar One is in effect, firms would be able use the difference between what they have paid in DST from January 2022, and what they would have paid if Pillar One had been in effect instead, as credit against their future corporation tax bill.

The Government says that this means that the UK either retains the amount raised that Pillar One would have delivered if it had been in place originally or the total revenue from the DST. The DST will then be removed in favour of the global solution, which was always the UK’s intention. To read the Government’s press release in full and for a link to the joint written statement and joint press release, click here.