Prime Time For Amazon: UK’s new Digital Services Tax only affects third-party sellers

October 29, 2020

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3 min read

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What's going on here?

Introduced in April, the UK’s Digital Services Tax (DST) – which is levied at 2% on revenues generated by the provision of search engines, social media services and online marketplaces to UK users – will only be paid by third-party sellers who use Amazon to sell their products.

What does this mean?

The DST applies to businesses whose digital activities generate more than £500m in revenues worldwide of which more than £25m of those must be derived from UK users. It is one example of several attempts by governments to rein in ‘big tech’ companies: on this occasion, through seeking to curb tax avoidance. Large US tech companies have employed a range of legal methods to minimise the taxes that they pay in countries such as the UK, most notably by diverting profits to low-tax jurisdictions.

The new tax, which is expected to raise around £500m a year, is being levied on service fees that third parties pay to use the platforms rather than on online sales. This means that third-party sellers on Amazon are bearing the brunt of the 2% levy, in the same way that advertising clients must pay an additional fee to Google and YouTube.

What's the big picture effect?

The increased fee charged to third-party traders is likely to result in an increase in the price of the goods that they sell to consumers. This gives Amazon a price advantage over these vendors as they can continue to sell competing goods at their original prices. Such a scenario will exacerbate the existing regulatory challenges that the eCommerce giant faces concerning the competitive implications of its dual role as both an online retailer and a marketplace for third-party traders. Accusations include that Amazon exploits third-party sellers’ data to compete against them. The new wave of investigations into anti-competitive practices coupled with the arrival of the DST, might, therefore, mean that third-party sellers are even better positioned to challenge the big tech company’s capacity to stifle market competition. Law firms with a strong competition litigation practice, could see an increase in demand for their services as third-party sellers and big tech companies end up in court over such matters.

The tax also mostly fails to achieve the purpose for which it was originally designed. The DST may bring additional compliance and legal costs for big tech companies, for example as they seek to understand which of their business activities fall within the scope of the tax. However, large multinationals are ultimately still able to avoid paying tax on their own sales. In addition, the £500m that the government expects to raise from the DST constitutes merely a tiny fraction of the billions of pounds of debt incurred as a result of the Covid-19 pandemic.

So, what more is likely to be done? The UK has been an active participant, along with other European countries, in negotiations with the OECD to adapt international tax rules to the digitalised economy. A multilateral agreement claims to provide a more effective solution to profit-shifting, whilst making tax rules fairer and more consistent for businesses. The government has expressly indicated that the UK DST will be dis-applied once a global solution is implemented. Negotiations are expected to draw to a close at the end of this year. But until then, Amazon is likely to benefit from the UK’s unilateral approach to taxing big tech.

Report written by Emilia De Rosa

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