Digital services tax – global tax agreement agreed between G7 finance ministers

Digital services tax has been a hot topic internationally for some time now as a mechanism to charge larger multinational companies that seek to minimise their tax burdens in many of the countries they operate. The UK introduced its own digital services tax in 2020 and similar taxes now exist other countries.

On 5 June 2021, a global tax agreement between the G7 finance ministers was agreed at the G7 Finance Ministers Meeting, held in London. This is the first step in agreeing a global solution, which includes taxing digital services.

Chaired by Chancellor Rishi Sunak, this agreement on global tax will mean that multinationals will pay a share of tax in the countries which they carry out business. The aim is to help tackle the tax challenges that are arising from the global digital economy. The agreement reached followed two days of talks.

As part of the deal agreed, the principle of a global minimum rate will ensure that multinational companies pay at least 15% in each country in which they operate.

Additionally, Ministers also agreed to mandatory climate reporting, following the UK’s lead and reached an agreement to crack down on the proceeds of environmental crimes.

A global tax agreement for digital services tax

The meeting resulted in the agreement of a global two pillar solution to deal with continued globalisation growth in the digital global economy.

Pillar One is intended to be a requirement for the largest multinationals, who are also the most profitable to pay tax in the countries where they operate, not just where they are headquartered.

This is intended to apply to global firms with a profit margin of at last 10%, with 20% of any profit above the 10% reallocated and subject to tax in the counties where they operate.

It is intended that the system will be fairer than existing arrangements and the Government believe the UK will raise more tax revenue from these larger multinationals.

Pillar Two is an agreement between the G7 to the principal of at least 15% global minimum corporation tax operating on a country-to-country basis.

The next steps for a global tax agreement

It may be some time before the plan is put into action. The next step would see this agreement discussed in further detail at the G20 Financial Ministers & Central Bank Governors Meeting in July 2021. Some commentators estimate the process could take up to four years to become international law, if an agreement can be reached.

What is the UK’s digital service tax?

Currently, the UK’s digital service tax (DST) imposes a 2% tax on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces to the extent that their revenues are linked to participation of UK users.

The tax applies regardless of where the corporate owner of those revenues is located and irrespective of any physical presence that it has in the UK. This applies to revenue earned since 1 April 2020.

The digital service tax is targeted at large companies that generate more than £500 million in global digital services revenues and £25m in UK digital services revenues, within a 12-month accounting period.

The effect of the global agreement the UK’s digital services tax

The UK government has said it would disapply its current digital services tax if an appropriate global solution was successfully agreed and implemented.

The US has been pressing European countries to remove their digital services taxes, which its administration believes unfairly targets US tech companies. The UK as well as France and Italy do not intent to remove their digital services taxes until the international agreement is implemented.

A joint statement issued by the G7 said digital taxes would remain in place for now. “We will provide for appropriate coordination between the application of the new international tax rules and the removal of all digital services taxes and other relevant similar measures, on all companies,” it read.

Alexander & Co – International Tax advice

The international tax team at Alexander & Co has a wealth of experience in international tax matters, both for individuals and businesses. Whether you are UK based and seeking advice on overseas tax, or an overseas business or individual seeking advice on UK tax we are here to help.

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