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1 November 2019

Taxing Tech – 4 of 5 Insights

UK Digital Services Tax – practical problems in identifying "users"

The UK Digital Services Tax (DST) is intended to apply from April 2020 and will potentially impact social media platforms, online marketplaces, dating websites and internet search engines.


Graham Samuel-Gibbon


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The draft DST, published on 11 July 2019, defines a "UK user" as any "person" who it is reasonable to assume, in the case of an individual, is normally in the UK and, in any other case, is established in the UK.

This definition refers to the user as the person or arrangement behind the account, not the account itself. This does not allow for both individuals and companies to open multiple accounts on the same platforms to use for different purposes or at different times, which is very common. Sainsbury's, for example, has an official page on Facebook for many of its approximately 1,400 stores, all of which may be attributable to Sainsbury's Supermarkets Limited as "user" – but the official page for Sainsbury's Bank should probably be attributed separately to Sainsbury's Bank plc.

Where platforms have the information and capacity, they may be able to link connected accounts to the same underlying person to identify a single user. In many cases, however, this will simply not be possible because the information is not in the public domain, and cannot be retrieved without platforms potentially falling foul of privacy and data protection law or facing an unreasonable compliance burden.

As a result, a "user" with defunct but still accessible accounts or multiple accounts is likely to be counted repeatedly. While this double-counting would happen worldwide, the proportion of UK individuals who are users of social media platforms is higher than in many states and has been so for longer, which could disproportionately inflate the number of UK users.

"Person" also suggests that this includes only legal or natural persons and these are clearly caught by the legislation. However, draft guidance on the meaning of a user covers "anyone using the platform or DST activity", including "other arrangements". It is unclear what this means for social media platforms which have accounts for groups or separate pages for those acting in an official or public capacity. Should Facebook count the page of Elton John (with its 6.5m followers) as a separate user from the private Facebook profile of Reginald Dwight? What about Elton John appreciation pages set up by unincorporated groups of worldwide fans?

Then there are bot accounts, that don't have an operator at all but could fall within the wide scope of "other arrangements". Although some bots (such as those which target real users maliciously or are set up to assist with fraud or identity theft) can be harmful, many encourage engagement with social media by automatically churning out content real users want to see. Take the example of the Twitter bot that churns out Harry Potter titles for academic papers or another which generates a new genus of moth regularly (complete with images). The fact that they are driven by a piece of code should not necessarily exclude them from a place in the digital service eco-system. If bots are "users", though, there is always a possibility that they are used to drive an innovative type of tax avoidance: generate enough bot users outside the UK and the proportion of your revenue attributable to UK users should fall.

Finally, HMRC currently accepts that online marketplaces could suffer from double-counting, as HMRC will count both the seller and buyer in a transaction as users even though the transaction between them may only give rise to one source of revenue for the marketplace.

It would help if HMRC made it clear that this double-counting is limited to UK-to-UK transactions, as the revenue arising from non-UK to UK transactions could be apportioned between jurisdictions. However, HMRC's example of a non-UK to UK transaction suggests that if the transaction relates to the UK (eg accommodation provided in the UK) even if one of the parties is not a non-UK user, the revenue from both sides of the transaction (eg the seller's facilitation fee and the buyer's transaction fee) should count as UK DST revenue. According to their example, this is the case regardless of whether any revenue is recognised in the non-UK location.

HMRC's draft guidance on the meaning of a user fits on one page and deals with none of these points, despite consultation responses bringing many of these concerns to their attention. Instead, it is left to companies to judge for themselves what constitutes a "user".

Without clarification, these issues will remain of concern in applying the UK DST, assuming it is introduced as currently proposed. Following adoption of the French DST, President Trump threatened to impose tax on the import of French wine into the USA. It appears that a deal has been done such that the French DST regime will continue, although France will revoke the rules once and assuming a new international agreement on digital taxation is reached (including repaying any French DST collected that exceeds the amount that would have been payable under the hypothetical new international agreement). It is likely that the same arrangement would be imposed on the UK in relation to its DST, and if the UK seeks a post-Brexit trade deal with the USA, it may be under even greater pressure to soften (or eliminate) the impact of its DST on US businesses.

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