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

The Global Tax Agreement was announced following a two-day meeting chaired by chancellor Rishi Sunak

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.

Related Resource

The impact of AWS in the UK

How AWS is powering Britain's fastest-growing companies

The impact of AWS in the UK - whitepaper from AWSDownload now

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".  

Featured Resources

Consumer choice and the payment experience

A software provider's guide to getting, growing, and keeping customers

Download now

Prevent fraud and phishing attacks with DMARC

How to use domain-based message authentication, reporting, and conformance for email security

Download now

Business in the new economy landscape

How we coped with 2020 and looking ahead to a brighter 2021

Download now

How to increase cyber resilience within your organisation

Cyber resilience for dummies

Download now

Most Popular

Best paying tech jobs of 2021
Careers & training

Best paying tech jobs of 2021

7 Jun 2021
Ten-year-old iOS 4 recreated as an iPhone app

Ten-year-old iOS 4 recreated as an iPhone app

10 Jun 2021
Mythic launches power-sipping AI chip

Mythic launches power-sipping AI chip

8 Jun 2021