UK to scrap Digital Services Tax in favour of G7 tax deal

The UK will scrap its Digital Services Tax (DST) once the G7's newly-proposed tax deal is in place, according to the HM Treasury.

The DST, which imposes a 2% tax on tech giants, was first announced in 2018 and has since been the subject of friction between the UK and US, where some of the world's largest tech companies are based.

However, on Saturday, Chancellor Rishi Sunak "reaffirmed" that the DST is a "temporary solution" that will be swapped for Pillar One of the G7's new Global Tax Agreement.

Consisting of two pillars, the international deal was agreed upon by finance ministers representing the seven richest democracies in the world: Canada, France, Germany, Italy, Japan, the UK, and the US. The Agreement was announced following a two-day London-based meeting chaired by Sunak, but had been in discussions "for years".

Pillar One, which will apply to firms with a profit margin of at least 10%, will ensure that the most profitable multinational companies will pay tax not only in the countries where they are headquartered but also where they operate. Under this rule, 20% of any profits above the 10% margin will be reallocated and then subjected to tax in the countries they operate. This means that, although Facebook's European HQ is based in Ireland, for example, it will still have to pay taxes in the UK.

Meanwhile, Pillar Two of the G7 Agreement ensures a global minimum corporation tax of 15% which will operate on a country by country basis, in an attempt to tackle the long-standing issue of tax avoidance of large companies.

Sunak described the two-pillar solution as "a truly historic agreement", adding that he is "proud the G7 has shown collective leadership at this crucial time in our global economic recovery".

"These seismic tax reforms are something the UK has been pushing for and a huge prize for the British taxpayer - creating a fairer tax system fit for the 21st century," he said.

However, the 15% tax has been criticised by some for being too low, with Green New Deal co-founder and Accountings professor Richard Murphy pointing out that Amazon might be able to dodge the tax due to the fact its profit margin sits below the 10% mark. However, Amazon's cloud subsidiary AWS, which has an operating margin of 30.5%, could be asked to pay up.

An Amazon spokesperson told IT Pro: "We believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system. The agreement by the G7 marks a welcome step forward in the effort to achieve this goal. We hope to see discussions continue to advance with the broader G20 and Inclusive Framework alliance."

Microsoft echoed Amazon's sentiments, telling IT Pro that it supports "the global approach to international income tax rules that provides predictability and certainty for taxpayers and tax authorities, minimises double taxation, and does not distort markets".