The UK HMRC (Her Majesty’s Revenue and Customs) tax office has confirmed the government’s plan to introduce a Digital Services Tax from next month on all UK and foreign companies.

This implies that tech companies such as Facebook, Google, Amazon, Microsoft and eBay will be required form 1 April 2020, to comply with a new 2% tax law which is placed on the revenues of search engines, social media services and online marketplaces that derive value from UK users.

“The application of the current corporate tax rules to businesses operating in the digital economy has led to a misalignment between the place where profits are taxed and the place where value is created,” said HMRC.

“This measure will ensure the large multinational businesses in-scope make a fair contribution to supporting vital public services [in the UK].”

Although the US government opposed the plan and threatens to retaliate against UK companies, the UK government is said to still believe that the most sustainable long-term solution to the tax challenges arising from digitalization is reform of the international corporate tax rules.  The UK government adds that it is committed to “dis-applying” the Digital Services Tax once an “appropriate” international solution is in place.

Major clauses that are included in the new UK Digital Services Tax law includes the following:

  1. Firms liable to Digital Services Tax are those with group worldwide revenues from the digital activities covered of more than £500 million, and if over £25 million of it is derived from UK users.
  2. If the group’s revenues exceed the above thresholds, its revenues derived from UK users will be taxed at a rate of 2%.
  3. Group’s first £25 million of revenues derived from UK users will not be subject to Digital Services Tax.
  4. Where one of the parties to a transaction on an online marketplace is a UK user, all of the revenues from that particular transaction will be treated as derived from UK users.
  5. The tax charged will be reduced to 50% of the revenues from any transactions when a user in respect of a marketplace transaction is normally located in a country that operates a similar tax to the Digital Services Tax, such as France.
  6. The Digital Services Tax will apply to revenue earned from 1 April 2020.

The UK government expects to raise around £280 million in the next financial year from the new tax law, and it is expected to rise to about £515 million in tax year 2024/25.